EATON CORP PLC
10-Qs and 10-Ks
PROXIES
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
10-Q
Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended
September 30, 2022
Commission file number
000-54863
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Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes
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No
☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes
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No
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Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer," “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act. (Check one):
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Emerging growth company |
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If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange
Act.
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes
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No
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There were
397.7
million Ordinary Shares outstanding as of September 30, 2022.
| TABLE OF CONTENTS | |||||
PART I — FINANCIAL INFORMATION
ITEM 1.
FINANCIAL STATEMENTS.
EATON CORPORATION plc
CONSOLIDATED STATEMENTS OF INCOME
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Three months ended
September 30 |
Nine months ended
September 30 |
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| (In millions except for per share data) | 2022 | 2021 | 2022 | 2021 | |||||||||||||||||||
| Net sales | $ |
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$ |
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$ |
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| Cost of products sold |
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| Selling and administrative expense |
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| Research and development expense |
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| Interest expense - net |
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| Gain on sale of business |
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| Other expense (income) - net |
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| Income before income taxes |
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| Income tax expense |
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| Net income |
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| Less net income for noncontrolling interests |
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| Net income attributable to Eaton ordinary shareholders | $ |
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$ |
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$ |
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$ |
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| Net income per share attributable to Eaton ordinary shareholders | |||||||||||||||||||||||
| Diluted | $ |
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$ |
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$ |
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$ |
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| Basic |
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| Weighted-average number of ordinary shares outstanding | |||||||||||||||||||||||
| Diluted |
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| Basic |
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| Cash dividends declared per ordinary share | $ |
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$ |
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$ |
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$ |
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The accompanying notes are an integral part of these condensed consolidated financial statements.
2
EATON CORPORATION plc
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
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Three months ended
September 30 |
Nine months ended
September 30 |
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| (In millions) | 2022 | 2021 | 2022 | 2021 | |||||||||||||||||||
| Net income | $ |
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$ |
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$ |
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$ |
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| Less net income for noncontrolling interests |
(
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(
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(
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(
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| Net income attributable to Eaton ordinary shareholders |
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| Other comprehensive income (loss), net of tax | |||||||||||||||||||||||
| Currency translation and related hedging instruments |
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| Pensions and other postretirement benefits |
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| Cash flow hedges |
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Other comprehensive income (loss) attributable to Eaton
ordinary shareholders |
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(
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Total comprehensive income attributable to Eaton
ordinary shareholders |
$ |
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$ |
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$ |
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$ |
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The accompanying notes are an integral part of these condensed consolidated financial statements.
3
EATON CORPORATION plc
CONSOLIDATED BALANCE SHEETS
| (In millions) |
September 30,
2022 |
December 31,
2021 |
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| Assets | |||||||||||
| Current assets | |||||||||||
| Cash | $ |
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$ |
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| Short-term investments |
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| Accounts receivable - net |
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| Inventory |
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| Prepaid expenses and other current assets |
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| Total current assets |
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| Property, plant and equipment | |||||||||||
| Land and buildings |
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| Machinery and equipment |
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| Gross property, plant and equipment |
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| Accumulated depreciation |
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| Net property, plant and equipment |
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| Other noncurrent assets | |||||||||||
| Goodwill |
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| Other intangible assets |
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| Operating lease assets |
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| Deferred income taxes |
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| Other assets |
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| Total assets | $ |
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$ |
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| Liabilities and shareholders’ equity | |||||||||||
| Current liabilities | |||||||||||
| Short-term debt | $ |
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$ |
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| Current portion of long-term debt |
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| Accounts payable |
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| Accrued compensation |
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| Other current liabilities |
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| Total current liabilities |
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| Noncurrent liabilities | |||||||||||
| Long-term debt |
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| Pension liabilities |
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| Other postretirement benefits liabilities |
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| Operating lease liabilities |
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| Deferred income taxes |
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| Other noncurrent liabilities |
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| Total noncurrent liabilities |
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| Shareholders’ equity | |||||||||||
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Ordinary shares (
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| Capital in excess of par value |
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| Retained earnings |
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| Accumulated other comprehensive loss |
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| Shares held in trust |
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| Total Eaton shareholders’ equity |
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| Noncontrolling interests |
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| Total equity |
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| Total liabilities and equity | $ |
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$ |
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The accompanying notes are an integral part of these condensed consolidated financial statements.
4
EATON CORPORATION plc
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
|
Nine months ended
September 30 |
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| (In millions) | 2022 | 2021 | |||||||||
| Operating activities | |||||||||||
| Net income | $ |
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$ |
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| Adjustments to reconcile to net cash provided by operating activities | |||||||||||
| Depreciation and amortization |
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| Deferred income taxes |
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| Pension and other postretirement benefits expense |
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| Contributions to pension plans |
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| Contributions to other postretirement benefits plans |
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| Gain on sale of business |
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| Changes in working capital |
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| Other - net |
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| Net cash provided by operating activities |
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| Investing activities | |||||||||||
| Capital expenditures for property, plant and equipment |
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| Cash paid for acquisitions of businesses, net of cash acquired |
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| Proceeds from sale of business, net of cash sold |
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| Proceeds from sales of property, plant and equipment |
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| Investments in associate companies |
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| Sales (purchases) of short-term investments - net |
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| Payments for settlement of currency exchange contracts not designated as hedges - net |
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| Other - net |
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| Net cash used in investing activities |
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| Financing activities | |||||||||||
| Proceeds from borrowings |
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| Payments on borrowings |
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| Short-term debt, net |
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| Cash dividends paid |
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| Exercise of employee stock options |
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| Repurchase of shares |
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| Employee taxes paid from shares withheld |
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| Other - net |
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| Net cash provided by (used in) financing activities |
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| Effect of currency on cash |
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| Total decrease in cash |
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| Cash at the beginning of the period |
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| Cash at the end of the period | $ |
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$ |
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The accompanying notes are an integral part of these condensed consolidated financial statements.
5
EATON CORPORATION plc
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Amounts are in millions unless indicated otherwise (per share data assume dilution). Columns and rows may not add and the sum of components may not equal total amounts reported due to rounding.
Note 1.
BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements of Eaton Corporation plc (Eaton or the Company) have been prepared in accordance with generally accepted accounting principles for interim financial information, the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by United States generally accepted accounting principles (US GAAP) for complete financial statements. However, in the opinion of management, all adjustments (consisting of normal recurring accruals) have been made that are necessary for a fair presentation of the condensed consolidated financial statements for the interim periods.
This Form 10-Q should be read in conjunction with the consolidated financial statements and related notes included in Eaton’s 2021 Form 10-K. The interim period results are not necessarily indicative of the results to be expected for the full year. Management has evaluated subsequent events through the date this Form 10-Q was filed with the Securities and Exchange Commission.
Eaton's reporting currency is United States Dollars (USD). The functional currency for most subsidiaries is their local currency. Financial statements for these subsidiaries are translated at exchange rates in effect at the balance sheet date as to assets and liabilities and weighted-average exchange rates as to revenues and expenses. The resulting translation adjustments are recognized in Accumulated other comprehensive loss. For subsidiaries operating in highly inflationary economies, non-monetary assets and liabilities such as inventory and property, plant and equipment and their related expenses are remeasured at historical exchange rates, while monetary assets and liabilities are remeasured at exchange rates in effect at the balance sheet date. Remeasurement adjustments for these subsidiaries are recognized in income.
Certain prior year amounts have been reclassified to conform to the current year presentation.
Note 2.
ACQUISITIONS AND DIVESTITURE OF BUSINESSES
Acquisition of Tripp Lite
On March 17, 2021, Eaton acquired Tripp Lite for $
1.65
billion, net of cash received. Tripp Lite is a leading supplier of power quality products and connectivity solutions including single-phase uninterruptible power supply systems, rack power distribution units, surge protectors, and enclosures for data centers, industrial, medical, and communications markets in the Americas. Tripp Lite is reported within the Electrical Americas business segment.
The acquisition of Tripp Lite has been accounted for using the acquisition method of accounting which requires the assets acquired and liabilities assumed be recognized at their respective fair values on the acquisition date. During the measurement period which ended in March 2022, opening balance sheet adjustments were made to finalize Eaton's fair value estimates based on the final valuations received, which are summarized in the table below. The measurement period adjustments did not have a material impact to the Consolidated Statements of Income.
| (In millions) | Preliminary Allocation | Measurement Period Adjustments |
Final
Allocation |
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| Short-term investments | $ |
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$ | — | $ |
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| Accounts receivable |
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| Inventory |
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| Prepaid expenses and other current assets |
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| Property, plant and equipment |
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| Other intangible assets |
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| Other assets |
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| Accounts payable |
(
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— |
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| Other current liabilities |
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(
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| Other noncurrent liabilities |
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| Total identifiable net assets |
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| Goodwill |
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| Total consideration, net of cash received | $ |
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$ |
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$ |
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6
Goodwill is calculated as the excess of the consideration transferred over the net assets recognized and represents the anticipated synergies of acquiring Tripp Lite. Goodwill recognized as a result of the acquisition is not deductible for tax purposes. The estimated fair values of the customer relationships, trademarks and technology intangible assets of $
539
million, $
33
million, and $
32
million, respectively, were determined using either the relief-from-royalty model or the multi-period excess earnings model, which are discounted cash flow models that rely on the Company's estimates. These estimates require judgment of future revenue growth rates, future margins, and the applicable weighted-average cost of capital used to discount those estimated cash flows. The weighted-average cost of capital is an estimate of the overall after-tax rate of return required by equity and debt market holders of a business enterprise. The estimated useful lives for customer relationships, trademarks and technology intangible assets were
20
years,
15
years, and
5
years, respectively. See Note 6 for additional information about goodwill.
Eaton's 2021 Condensed Consolidated Financial Statements include Tripp Lite’s results of operations, including segment operating profit of $
96
million on sales of $
283
million, from the date of acquisition through September 30, 2021.
Acquisition of Mission Systems
On June 1, 2021, Eaton acquired Mission Systems for $
2.80
billion, net of cash received. Mission Systems is a leading manufacturer of air-to-air refueling systems, environmental systems, and actuation primarily for defense markets. Mission Systems is reported within the Aerospace business segment.
The acquisition of Mission Systems has been accounted for using the acquisition method of accounting which requires the assets acquired and liabilities assumed be recognized at their respective fair values on the acquisition date. During the measurement period which ended in June 2022, opening balance sheet adjustments were made to finalize Eaton's fair value estimates based on the final valuations received, which are summarized in the table below. The measurement period adjustments did not have a material impact to the Consolidated Statements of Income.
| (In millions) | Preliminary Allocation | Measurement Period Adjustments |
Final
Allocation |
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| Accounts receivable | $ |
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$ |
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$ |
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| Inventory |
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(
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| Prepaid expenses and other current assets |
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| Property, plant and equipment |
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| Other intangible assets |
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| Other assets |
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| Accounts payable |
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| Other current liabilities |
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| Other noncurrent liabilities |
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(
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| Total identifiable net assets |
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| Goodwill |
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| Total consideration, net of cash received | $ |
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$ |
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$ |
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Goodwill is calculated as the excess of the consideration transferred over the net assets recognized and represents the anticipated synergies of acquiring Mission Systems. As a result of the acquisition, goodwill of $
572
million recognized in the United States is expected to be deductible for tax purposes. The estimated fair values of the customer relationships, technology, and backlog intangible assets of $
764
million, $
612
million, and $
86
million, respectively, were determined using either the relief-from-royalty model or the multi-period excess earnings model, which are discounted cash flow models that rely on the Company's estimates. These estimates require judgment of future revenue growth rates, future margins, and the applicable weighted-average cost of capital used to discount those estimated cash flows. The estimated fair value of technology intangibles is also based on the selection of royalty rates used in the valuation model. The weighted-average cost of capital is an estimate of the overall after-tax rate of return required by equity and debt market holders of a business enterprise. The estimated useful lives for customer relationships, technology, and backlog intangible assets were
22
years,
21
years, and
2
years, respectively. See Note 6 for additional information about goodwill.
Eaton's 2021 Condensed Consolidated Financial Statements include Mission Systems’ results of operations, including segment operating profit of $
65
million on sales of $
252
million, from the date of acquisition through September 30, 2021.
7
Sale of Hydraulics business
On August 2, 2021, Eaton completed the sale of the Hydraulics business to Danfoss A/S. As a result of the sale, the Company received $
3.1
billion, net of cash sold, and recognized a pre-tax gain of $
617
million in 2021. According to the terms of the sales agreement, the Company finalized negotiations of post-closing adjustments with Danfoss A/S during the first quarter of 2022. As a result of these negotiations, the Company recognized an additional pre-tax gain of $
24
million. In the second quarter of 2022, Eaton received cash of $
22
million from Danfoss A/S to fully settle all post-closing adjustments. The business had sales of $
1.3
billion in 2021 through the date of the sale.
Acquisition of Royal Power Solutions
On January 5, 2022, Eaton acquired Royal Power Solutions for $
612
million, net of cash received. Royal Power Solutions is a U.S. based manufacturer of high-precision electrical connectivity components used in electric vehicle, energy management, industrial and mobility markets. Royal Power Solutions is reported within the eMobility business segment.
The acquisition of Royal Power Solutions has been accounted for using the acquisition method of accounting which requires the assets acquired and liabilities assumed be recognized at their respective fair values on the acquisition date, as well as measurement period adjustments recorded as of September 30, 2022.
The table below summarizes the preliminary estimated fair values of the assets acquired and liabilities assumed on the acquisition date. These preliminary estimates will continue to be revised during the measurement period as third-party valuations are received and finalized, further information becomes available and additional analyses are performed, and these differences could have a material impact on Eaton's preliminary purchase price allocation. The current measurement period adjustments did not have a material impact to the Consolidated Statements of Income.
| (In millions) | Preliminary Allocation | Measurement Period Adjustments | Adjusted Preliminary Allocation | |||||||||||||||||
| Accounts receivable | $ |
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$ |
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$ |
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| Inventory |
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| Prepaid expenses and other current assets |
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| Property, plant and equipment |
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| Other intangible assets |
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| Other assets |
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(
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| Accounts payable |
(
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(
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| Other current liabilities |
(
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(
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| Other noncurrent liabilities |
(
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(
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| Total identifiable net assets |
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| Goodwill |
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(
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| Total consideration, net of cash received | $ |
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$ |
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$ |
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Goodwill is calculated as the excess of the consideration transferred over the net assets recognized and represents the anticipated synergies of acquiring Royal Power Solutions. Goodwill recognized as a result of the acquisition is not deductible for tax purposes. Other intangible assets of $
306
million are expected to include customer relationships, trademarks and technology. Given the timing of the acquisition, Eaton utilized a benchmarking approach based on similar acquisitions to determine the preliminary fair values for intangible assets. See Note 6 for additional information about goodwill.
Eaton's 2022 Condensed Consolidated Financial Statements include Royal Power Solutions' results of operations, including segment operating profit of $
17
million on sales of $
120
million, from the date of acquisition through September 30, 2022.
Russia
During the second quarter of 2022, in light of the ongoing war with Ukraine, the Company decided to exit its business operations in Russia and recorded charges of $
29
million presented in Other expense (income) - net on the Consolidated Statements of Income. The charges consisted primarily of write-downs of accounts receivable, inventory and other assets, and accruals for severance.
Acquisition of a
50
%
stake in Jiangsu Huineng Electric Co., Ltd’s circuit breaker business
On July 1, 2022, Eaton acquired a
50
percent stake in Jiangsu Huineng Electric Co., Ltd’s circuit breaker business, which manufactures and markets low-voltage circuit breakers in China. Eaton accounts for this investment on the equity method of accounting and is reported within the Electrical Global business segment.
8
Note 3.
REVENUE RECOGNITION
Sales are recognized when obligations under the terms of the contract are satisfied and control of promised goods or services have transferred to our customers. Control is transferred when the customer has the ability to direct the use of and obtain benefits from the goods or services. Sales are measured at the amount of consideration the Company expects to be paid in exchange for these products or services.
The following table provides disaggregated sales by lines of businesses, geographic destination, market channel or end market, as applicable, for the Company's operating segments:
|
Three months ended
September 30 |
Nine months ended
September 30 |
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| (In millions) | 2022 | 2021 | 2022 | 2021 | |||||||||||||||||||
| Electrical Americas | |||||||||||||||||||||||
| Products | $ |
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$ |
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$ |
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$ |
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| Systems |
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| Total | $ |
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$ |
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$ |
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$ |
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| Electrical Global | |||||||||||||||||||||||
| Products | $ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||
| Systems |
|
|
|
|
|||||||||||||||||||
| Total | $ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||
| Hydraulics | |||||||||||||||||||||||
| United States | $ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||
| Rest of World |
|
|
|
|
|||||||||||||||||||
| Total | $ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||
| Aerospace | |||||||||||||||||||||||
| Original Equipment Manufacturers | $ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||
| Aftermarket |
|
|
|
|
|||||||||||||||||||
| Industrial and Other |
|
|
|
|
|||||||||||||||||||
| Total | $ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||
| Vehicle | |||||||||||||||||||||||
| Commercial | $ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||
| Passenger and Light Duty |
|
|
|
|
|||||||||||||||||||
| Total | $ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||
| eMobility | $ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||
| Total net sales | $ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||
9
The timing of revenue recognition, billings and cash collections results in billed accounts receivable, unbilled receivables (revenue recognized exceeds amount billed to the customer), and deferred revenue (advance payments and billings in excess of revenue recognized). Accounts receivable from customers were $
3,394
million and $
2,896
million at September 30, 2022 and December 31, 2021, respectively. Amounts are billed as work progresses in accordance with agreed-upon contractual terms, either at periodic intervals or upon achievement of contractual milestones. These assets and liabilities are reported on the Consolidated Balance Sheets on a contract-by-contract basis at the end of each reporting period. Unbilled receivables were $
231
million and $
187
million at September 30, 2022 and December 31, 2021, respectively, and are recorded in Prepaid expenses and other current assets. The increase in unbilled receivables reflects higher revenue recognized from increased business activity in 2022.
Changes in the deferred revenue liabilities are as follows:
| (In millions) | Deferred Revenue | ||||
| Balance at January 1, 2022 | $ |
|
|||
| Customer deposits and billings |
|
||||
| Revenue recognized in the period |
(
|
||||
| Translation and other |
(
|
||||
| Balance at September 30, 2022 | $ |
|
|||
| (In millions) | Deferred Revenue | ||||
| Balance at January 1, 2021 | $ |
|
|||
| Customer deposits and billings |
|
||||
| Revenue recognized in the period |
(
|
||||
| Deferred revenue from business acquisitions |
|
||||
| Translation and other |
(
|
||||
| Balance at September 30, 2021 | $ |
|
|||
Deferred revenue liabilities of $
407
million and $
395
million as of September 30, 2022 and December 31, 2021, respectively, were included in Other current liabilities with the remaining balance presented in Other noncurrent liabilities.
Note 4.
CREDIT LOSSES FOR RECEIVABLES
Receivables are exposed to credit risk based on the customers’ ability to pay which is influenced by, among other factors, their financial liquidity position. Eaton’s receivables are generally short-term in nature with a majority outstanding less than 90 days.
Eaton performs ongoing credit evaluation of its customers and maintains sufficient allowances for potential credit losses. The Company evaluates the collectability of its receivables based on the length of time the receivable is past due, and any anticipated future write-off based on historic experience adjusted for market conditions. The Company's segments, supported by our global credit department, perform the credit evaluation and monitoring process to estimate and manage credit risk. The process includes an evaluation of credit losses for both the overall segment receivable and specific customer balances. The process also includes review of customer financial information and credit ratings, approval and monitoring of customer credit limits, and an assessment of market conditions. The Company may also require prepayment from customers to mitigate credit risk. Receivable balances are written off against an allowance for credit losses after a final determination of collectability has been made.
Accounts receivable are net of an allowance for credit losses of $
43
million and $
42
million at September 30, 2022 and December 31, 2021, respectively. The change in the allowance for credit losses includes expense and net write-offs, none of which are significant.
10
Note 5.
INVENTORY
Inventory is carried at lower of cost or net realizable value.
The components of inventory are as follows:
| (In millions) |
September 30,
2022 |
December 31,
2021 |
|||||||||
| Raw materials | $ |
|
$ |
|
|||||||
| Work-in-process |
|
|
|||||||||
| Finished goods |
|
|
|||||||||
| Total inventory | $ |
|
$ |
|
|||||||
Note 6.
GOODWILL
Changes in the carrying amount of goodwill by segment are as follows:
| (In millions) |
January 1,
2022 |
Additions | Translation |
September 30,
2022 |
|||||||||||||||||||
| Electrical Americas | $ |
|
$ |
|
$ |
(
|
$ |
|
|||||||||||||||
| Electrical Global |
|
|
(
|
|
|||||||||||||||||||
| Aerospace |
|
|
(
|
|
|||||||||||||||||||
| Vehicle |
|
|
(
|
|
|||||||||||||||||||
| eMobility |
|
|
(
|
|
|||||||||||||||||||
| Total | $ |
|
$ |
|
$ |
(
|
$ |
|
|||||||||||||||
The 2022 additions to goodwill relate primarily to the anticipated synergies of acquiring Royal Power Solutions and Mission Systems. The allocation of the Royal Power Solutions purchase price is preliminary and will be completed during the measurement period.
Note 7.
DEBT
On August 23, 2022, a subsidiary of Eaton issued sustainability-linked senior notes (2022 Sustainability-Linked Notes) and senior notes (2022 Senior Notes, and collectively referred to as the Notes). The 2022 Sustainability-Linked Notes have a face amount of $
1.3
billion, mature in 2033, and pay interest semi-annually at an initial interest rate of
4.15
% per annum. Beginning in September 2028, the interest rate payable on the 2022 Sustainability-Linked Notes will be increased by an additional
25
basis points per annum if the Scope 1 and Scope 2 greenhouse gas emissions sustainability performance target is not met. The 2022 Senior Notes have a face amount of $
700
million, mature in 2052, and pay interest semi-annually at
4.70
% per annum. The issuer received proceeds totaling $
1.98
billion from the issuance of the Notes, net of financing costs and discounts. The Notes are fully and unconditionally guaranteed on an unsubordinated, unsecured basis by Eaton and certain of its direct and indirect subsidiaries. The Notes contain customary optional redemption and par call provisions. The Notes also contain a change of control provision which requires the issuer to make an offer to purchase all or any part of the Notes at a purchase price of
101
% of the principal amount plus accrued and unpaid interest. The capitalized deferred financing fees are amortized in Interest expense-net over the respective terms of the Notes. The Notes are subject to customary non-financial covenants.
On October 3, 2022, the Company replaced its existing $
2,000
million
five-year
revolving credit facility with a new $
2,500
million
five-year
revolving credit facility that will expire on October 1, 2027. On the same date, the Company replaced its existing $
500
million
364-day
revolving credit facility with a new $
500
million
364-day
revolving credit facility that will expire on October 2, 2023. The revolving credit facilities totaling $
3,000
million are used to support commercial paper borrowings and are fully and unconditionally guaranteed by Eaton and certain of its direct and indirect subsidiaries on an unsubordinated, unsecured basis. In October 2022, the Company also upsized its commercial paper program to $
3,000
million. There were
no
borrowings outstanding under Eaton’s revolving credit facilities at September 30, 2022. The Company had access to the commercial paper markets through its $
3,000
million commercial paper program, of which $
878
million was outstanding on September 30, 2022.
11
Note 8.
RETIREMENT BENEFITS PLANS
The components of retirement benefits expense (income) are as follows:
|
United States
pension benefit expense (income) |
Non-United States
pension benefit expense (income) |
Other postretirement
benefits expense (income) |
|||||||||||||||||||||||||||||||||
| Three months ended September 30 | |||||||||||||||||||||||||||||||||||
| (In millions) | 2022 | 2021 | 2022 | 2021 | 2022 | 2021 | |||||||||||||||||||||||||||||
| Service cost | $ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||||||||||
| Interest cost |
|
|
|
|
|
|
|||||||||||||||||||||||||||||
| Expected return on plan assets |
(
|
(
|
(
|
(
|
|
|
|||||||||||||||||||||||||||||
| Amortization |
|
|
|
|
(
|
(
|
|||||||||||||||||||||||||||||
|
(
|
(
|
|
|
|
(
|
||||||||||||||||||||||||||||||
| Settlements and curtailments |
|
|
|
|
|
(
|
|||||||||||||||||||||||||||||
| Total expense (income) | $ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
(
|
|||||||||||||||||||||||
|
United States
pension benefit expense (income) |
Non-United States
pension benefit expense (income) |
Other postretirement
benefits expense (income) |
|||||||||||||||||||||||||||||||||
| Nine months ended September 30 | |||||||||||||||||||||||||||||||||||
| (In millions) | 2022 | 2021 | 2022 | 2021 | 2022 | 2021 | |||||||||||||||||||||||||||||
| Service cost | $ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||||||||||
| Interest cost |
|
|
|
|
|
|
|||||||||||||||||||||||||||||
| Expected return on plan assets |
(
|
(
|
(
|
(
|
|
|
|||||||||||||||||||||||||||||
| Amortization |
|
|
|
|
(
|
(
|
|||||||||||||||||||||||||||||
|
(
|
(
|
|
|
|
|
||||||||||||||||||||||||||||||
| Settlements and curtailments |
|
|
|
|
|
(
|
|||||||||||||||||||||||||||||
| Total expense (income) | $ |
|
$ |
(
|
$ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||||||||||
The components of retirement benefits expense (income) other than service costs are included in Other expense (income) - net.
During 2020, the Company announced it was freezing its United States pension plans for its non-union employees. The freeze was effective January 1, 2021 for non-union U.S. employees whose retirement benefit was determined under a cash balance formula and is effective January 1, 2026 for non-union U.S. employees whose retirement benefit is determined under a final average pay formula.
During the third quarter and first nine months of 2022, the Company recognized settlement losses from lump-sum distributions of $
18
million and $
50
million, respectively. During the third quarter and first nine months of 2021, the Company recognized settlement losses from lump-sum distributions of $
21
million and $
48
million, respectively. The Company remeasured certain pension plans as a result of lump-sum distributions exceeding or expected to exceed the sum of service and interest costs for the year.
These remeasurements resulted in the following changes:
| Increase (decrease) | Increase (decrease) | ||||||||||||||||||||||
|
Three months ended
September 30 |
Nine months ended
September 30 |
||||||||||||||||||||||
| (In millions) | 2022 | 2021 | 2022 | 2021 | |||||||||||||||||||
| Funded status | $ |
(
|
$ |
(
|
$ |
(
|
$ |
|
|||||||||||||||
| Accumulated other comprehensive loss |
|
|
|
(
|
|||||||||||||||||||
Total retirement benefits expense for the third quarter and first nine months of 2021 of $
27
million and $
54
million, respectively, included $
13
million of settlement and curtailment expense related to the sale of the Hydraulics business discussed in Note 2.
12
Note 9.
LEGAL CONTINGENCIES
Note 10.
INCOME TAXES
The effective income tax rate for the third quarter of 2022 was expense of
15.5
% compared to expense of
43.4
% for the third quarter of 2021. The effective income tax rate for the first nine months of 2022 was expense of
15.4
% compared to expense of
29.8
% for the first nine months of 2021. The decrease in the effective tax rate in the third quarter and first nine months of 2022 was primarily due to the one-time tax impact on the gain from the sale of the Hydraulics business in the third quarter of 2021 discussed in Note 2.
Brazil Tax Years 2005-2012
The Company has
two
Brazilian tax cases primarily relating to the amortization of certain goodwill generated from the acquisition of third-party businesses and corporate reorganizations. One case involves tax years 2005-2008 (Case 1), and the other involves tax years 2009-2012 (Case 2). Case 2 is proceeding on a more accelerated timeline than Case 1. For Case 2, the Company received a tax assessment in 2014 that included interest and penalties. In November 2019, the Company received an unfavorable result at the final tax administrative appeals level, resulting in an alleged tax deficiency of $
26
million plus $
98
million of interest and penalties (translated at the September 30, 2022 exchange rate). The Company is challenging this assessment in the judicial system and, on April 18, 2022, received an unfavorable decision at the first judicial level. On April 27, 2022, the Company filed a motion for clarification relating to that decision. On May 20, 2022, the court largely upheld its prior decision without further clarification. On June 9, 2022, the Company filed its notice of appeal to the second level court. The Company intends to continue its challenge of this assessment in the judicial system.
As previously disclosed for Case 1, the Company received a separate tax assessment alleging a tax deficiency of $
31
million plus $
106
million of interest and penalties (translated at the September 30, 2022 exchange rate), which the Company is challenging in the judicial system. This case is still pending resolution at the first judicial level.
Both cases are expected to take several years to resolve through the Brazilian judicial system and require provision of certain assets as security for the alleged deficiencies. As of September 30, 2022, the Company pledged Brazilian real estate assets with net book value of $
19
million and provided additional security in the form of bank secured bonds and insurance bonds totaling $
110
million and a cash deposit of $
18
million (translated at the September 30, 2022 exchange rate).
U.S. Tax Years 2005-2006
In 2011, the United States Internal Revenue Service (IRS) issued a Statutory Notice of Deficiency for the Company’s United States subsidiaries (Eaton US) for the 2005 and 2006 tax years (the 2005-06 Notice), which Eaton US contested in United States Tax Court. The 2005-06 Notice proposed assessments of $
75
million in additional taxes plus $
52
million in penalties related primarily to transfer pricing adjustments for products manufactured in the Company's facilities in Puerto Rico and the Dominican Republic and sold to affiliated companies located in the United States. Eaton US has set its transfer prices for products sold between these affiliates at the same prices that Eaton US sells such products to third parties as required by
two
successive Advance Pricing Agreements (APAs) Eaton US entered into with the IRS that governed the 2005-2010 tax years. Eaton US has continued to apply the APA pricing methodology for 2011 through the current reporting period. Immediately prior to the 2005-06 Notice being issued, the IRS sent a letter stating that it was retrospectively canceling the APAs. The case in Tax Court involved whether the IRS improperly cancelled the APAs. On July 26, 2017, the Tax Court issued a ruling in which it agreed with Eaton US that the IRS must abide by the terms of the APAs for the tax years 2005-2006. The Tax Court’s ruling on the APAs did not have a material impact on Eaton’s consolidated financial statements. On May 24, 2021, the IRS filed a notice to appeal the Tax Court’s ruling to the United States Sixth Circuit Court of Appeals. In July 2022, the Sixth Circuit panel heard oral arguments, and on August 25, 2022, issued a ruling in favor of Eaton US, confirming that the IRS must abide by the terms of the APAs. The Sixth Circuit’s ruling did not have a material impact on the Company’s consolidated financial statements. The IRS has until November 23, 2022 to file a petition with the U.S. Supreme Court, if they elect to do so.
13
U.S. Tax Years 2007-2010
In 2014, the IRS issued a Statutory Notice of Deficiency for Eaton US for the 2007 through 2010 tax years (the 2007-10 Notice), which Eaton US contested in Tax Court. The 2007-10 Notice proposed assessments of $
190
million in additional taxes plus $
72
million in penalties, net of agreed credits and deductions. The proposed assessments pertain to: (i) the same transfer pricing issues and APA for which the Tax Court and Sixth Circuit have issued rulings as noted above; and (ii) the separate proposed assessment noted below. The Company believes that the Sixth Circuit Court of Appeals ruling discussed above for tax years 2005-2006 should also resolve the APA cancellation issue for the 2007-2010 years. Eaton and the IRS have recognized that the ruling on the enforceability of the APA did not address a secondary issue regarding the transfer pricing for a certain royalty paid from 2006-2010. Eaton US reported a consistent royalty rate for 2006-2010. The IRS has agreed to the royalty rate as reported by Eaton US in 2006. Although the IRS has not proposed an alternative rate, it has not agreed to apply the same royalty rate in the 2007-2010 years.
The 2007-10 Notice also includes a separate proposed assessment involving the recognition of income for several of Eaton US’s controlled foreign corporations. The Company believes that the proposed assessment is without merit and contested the matter in Tax Court. In October 2017, Eaton and the IRS both moved for partial summary judgment on this issue. On February 25, 2019, the Tax Court granted the IRS’s motion for partial summary judgment and denied Eaton’s. The Company intends to appeal the Tax Court’s partial summary judgment decision to the United States Sixth Circuit Court of Appeals. The total potential impact of the Tax Court's partial summary judgment decision on the controlled foreign corporation income recognition issue is not estimable until all matters in the open tax years have been resolved.
The Company believes that the final resolution of the Brazil assessments and remaining U.S. assessments for Tax Years 2007-2010 discussed above will not have a material impact on its condensed consolidated financial statements. The ultimate outcome of these matters cannot be predicted with certainty given the complex nature of tax controversies. Should the ultimate outcome of any one of these matters deviate from our reasonable expectations, they may have a material adverse impact on the Company’s condensed consolidated financial statements. However, Eaton believes that its interpretations of tax laws and application of tax laws to its facts are correct, and that its accrual of unrecognized income tax benefits is appropriate with respect to these matters.
14
Note 11.
EQUITY
On February 27, 2019, the Board of Directors adopted a share repurchase program for share repurchases up to $
5.0
billion of ordinary shares (2019 Program). On February 23, 2022, the Board renewed the 2019 Program by providing authority for up to $
5.0
billion in repurchases to be made during the
three-year
period commencing on that date (2022 Program). Under the 2022 Program, the ordinary shares are expected to be repurchased over time, depending on market conditions, the market price of ordinary shares, capital levels, and other considerations. During the three and nine months ended September 30, 2022,
0.7
million and
2.0
million ordinary shares, respectively, were repurchased under the 2022 program in the open market at a total cost of $
100
million and $
286
million, respectively. During the three and nine months ended September 30, 2021,
0.3
million and
0.9
million ordinary shares, respectively, were repurchased under the 2019 Program in the open market at a total cost of $
46
million and $
122
million, respectively.
The changes in Shareholders’ equity are as follows:
| Ordinary shares | Capital in excess of par value | Retained earnings | Accumulated other comprehensive loss | Shares held in trust | Total Eaton shareholders' equity | Noncontrolling interests | Total equity | ||||||||||||||||||||||||||||||||||||||||||||||
| (In millions) | Shares | Dollars | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance at January 1, 2022 |
|
$ |
|
$ |
|
$ |
|
$ |
(
|
$ |
(
|
$ |
|
$ |
|
$ |
|
||||||||||||||||||||||||||||||||||||
| Net income | — | — | — |
|
— | — |
|
|
|
||||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive income, net of tax |
|
|
— |
|
|||||||||||||||||||||||||||||||||||||||||||||||||
| Cash dividends paid and accrued | — | — | — |
(
|
— | — |
(
|
(
|
(
|
||||||||||||||||||||||||||||||||||||||||||||
| Issuance of shares under equity-based compensation plans |
|
— |
(
|
(
|
— | — |
(
|
— |
(
|
||||||||||||||||||||||||||||||||||||||||||||
| Changes in noncontrolling interest of consolidated subsidiaries - net | — | — | — | — | — | — | — |
(
|
(
|
||||||||||||||||||||||||||||||||||||||||||||
| Repurchase of shares |
(
|
— | — |
(
|
— | — |
(
|
— |
(
|
||||||||||||||||||||||||||||||||||||||||||||
| Balance at March 31, 2022 |
|
$ |
|
$ |
|
$ |
|
$ |
(
|
$ |
(
|
$ |
|
$ |
|
$ |
|
||||||||||||||||||||||||||||||||||||
| Net income | — | — | — |
|
— | — |
|
— |
|
||||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive loss, net of tax |
(
|
(
|
(
|
||||||||||||||||||||||||||||||||||||||||||||||||||
| Cash dividends paid | — | — | — |
(
|
— | — |
(
|
— |
(
|
||||||||||||||||||||||||||||||||||||||||||||
| Issuance of shares under equity-based compensation plans | — | — |
|
|
— | — |
|
— |
|
||||||||||||||||||||||||||||||||||||||||||||
| Changes in noncontrolling interest of consolidated subsidiaries - net | — | — |
(
|
— | — | — |
(
|
— |
(
|
||||||||||||||||||||||||||||||||||||||||||||
| Repurchase of shares |
(
|
— | — |
(
|
— | — |
(
|
— |
(
|
||||||||||||||||||||||||||||||||||||||||||||
| Balance at June 30, 2022 |
|
$ |
|
$ |
|
$ |
|
$ |
(
|
$ |
(
|
$ |
|
$ |
|
$ |
|
||||||||||||||||||||||||||||||||||||
| Net income | — | — | — |
|
— | — |
|
|
|
||||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive loss, net of tax |
(
|
(
|
(
|
||||||||||||||||||||||||||||||||||||||||||||||||||
| Cash dividends paid | — | — | — |
(
|
— | — |
(
|
— |
(
|
||||||||||||||||||||||||||||||||||||||||||||
| Issuance of shares under equity-based compensation plans |
|
— |
|
— | — | — |
|
— |
|
||||||||||||||||||||||||||||||||||||||||||||
| Changes in noncontrolling interest of consolidated subsidiaries - net | — | — | — | — | — | — | — |
(
|
(
|
||||||||||||||||||||||||||||||||||||||||||||
| Repurchase of shares |
(
|
— | — |
(
|
— | — |
(
|
— |
(
|
||||||||||||||||||||||||||||||||||||||||||||
| Balance at September 30, 2022 |
|
$ |
|
$ |
|
$ |
|
$ |
(
|
$ |
(
|
$ |
|
$ |
|
$ |
|
||||||||||||||||||||||||||||||||||||
15
| Ordinary shares | Capital in excess of par value | Retained earnings | Accumulated other comprehensive loss | Shares held in trust | Total Eaton shareholders' equity | Noncontrolling interests | Total equity | ||||||||||||||||||||||||||||||||||||||||||||||
| (In millions) | Shares | Dollars | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance at January 1, 2021 |
|
$ |
|
$ |
|
$ |
|
$ |
(
|
$ |
(
|
$ |
|
$ |
|
$ |
|
||||||||||||||||||||||||||||||||||||
| Net income | — | — | — |
|
— | — |
|
|
|
||||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive loss, net of tax |
(
|
(
|
— |
(
|
|||||||||||||||||||||||||||||||||||||||||||||||||
| Cash dividends paid and accrued | — | — | — |
(
|
— | — |
(
|
— |
(
|
||||||||||||||||||||||||||||||||||||||||||||
| Issuance of shares under equity-based compensation plans |
|
— |
|
(
|
— | — |
|
— |
|
||||||||||||||||||||||||||||||||||||||||||||
| Changes in noncontrolling interest of consolidated subsidiaries - net | — | — | — | — | — | — | — |
(
|
(
|
||||||||||||||||||||||||||||||||||||||||||||
| Repurchase of shares |
(
|
— | — |
(
|
— | — |
(
|
— |
(
|
||||||||||||||||||||||||||||||||||||||||||||
| Balance at March 31, 2021 |
|
$ |
|
$ |
|
$ |
|
$ |
(
|
$ |
(
|
$ |
|
$ |
|
$ |
|
||||||||||||||||||||||||||||||||||||
| Net income | — | — | — |
|
— | — |
|
— |
|
||||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive income, net of tax |
|
|
|
||||||||||||||||||||||||||||||||||||||||||||||||||
| Cash dividends paid | — | — | — |
(
|
— | — |
(
|
— |
(
|
||||||||||||||||||||||||||||||||||||||||||||
| Issuance of shares under equity-based compensation plans |
|
— |
|
— | — |
|
|
— |
|
||||||||||||||||||||||||||||||||||||||||||||
| Repurchase of shares |
(
|
— | — |
(
|
— | — |
(
|
— |
(
|
||||||||||||||||||||||||||||||||||||||||||||
| Balance at June 30, 2021 |
|
$ |
|
$ |
|
$ |
|
$ |
(
|
$ |
(
|
$ |
|
$ |
|
$ |
|
||||||||||||||||||||||||||||||||||||
| Net income | — | — | — |
|
— | — |
|
|
|
||||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive income, net of tax |
|
|
|
||||||||||||||||||||||||||||||||||||||||||||||||||
| Cash dividends paid | — | — | — |
(
|
— | — |
(
|
— |
(
|
||||||||||||||||||||||||||||||||||||||||||||
| Issuance of shares under equity-based compensation plans |
|
— |
|
(
|
— | — |
|
— |
|
||||||||||||||||||||||||||||||||||||||||||||
| Repurchase of shares |
(
|
— | — |
(
|
— | — |
(
|
— |
(
|
||||||||||||||||||||||||||||||||||||||||||||
| Balance at September 30, 2021 |
|
$ |
|
$ |
|
$ |
|
$ |
(
|
$ |
(
|
$ |
|
$ |
|
$ |
|
||||||||||||||||||||||||||||||||||||
The changes in Accumulated other comprehensive loss are as follows:
| (In millions) | Currency translation and related hedging instruments | Pensions and other postretirement benefits |
Cash flow
hedges |
Total | |||||||||||||||||||
| Balance at January 1, 2022 | $ |
(
|
$ |
(
|
$ |
(
|
$ |
(
|
|||||||||||||||
|
Other comprehensive income (loss) before
reclassifications |
(
|
(
|
|
(
|
|||||||||||||||||||
|
Amounts reclassified from Accumulated other
comprehensive loss (income) |
|
|
(
|
|
|||||||||||||||||||
|
Net current-period Other comprehensive
income (loss) |
(
|
|
|
(
|
|||||||||||||||||||
| Balance at September 30, 2022 | $ |
(
|
$ |
(
|
$ |
|
$ |
(
|
|||||||||||||||
16
The reclassifications out of Accumulated other comprehensive loss are as follows:
| (In millions) | Nine months ended September 30, 2022 |
Consolidated statements
of income classification |
|||||||||
|
Amortization of defined benefit pensions and other
postretirement benefits items
|
|||||||||||
| Actuarial loss and prior service cost | $ |
(
|
1 | ||||||||
| Tax benefit |
|
||||||||||
| Total, net of tax |
(
|
||||||||||
| Gains and (losses) on cash flow hedges | |||||||||||
| Floating-to-fixed interest rate swaps |
|
Interest expense - net | |||||||||
| Currency exchange contracts |
|
Net sales and Cost of products sold | |||||||||
| Tax expense |
(
|
||||||||||
| Total, net of tax |
|
||||||||||
| Total reclassifications for the period | $ |
(
|
|||||||||
1
These components of Accumulated other comprehensive loss are included in the computation of net periodic benefit cost. See Note 8 for additional information about pension and other postretirement benefits items.
Net Income Per Share Attributable to Eaton Ordinary Shareholders
A summary of the calculation of net income per share attributable to Eaton ordinary shareholders is as follows:
|
Three months ended
September 30 |
Nine months ended
September 30 |
||||||||||||||||||||||
| (In millions except for per share data) | 2022 | 2021 | 2022 | 2021 | |||||||||||||||||||
| Net income attributable to Eaton ordinary shareholders | $ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||
| Weighted-average number of ordinary shares outstanding - diluted |
|
|
|
|
|||||||||||||||||||
| Less dilutive effect of equity-based compensation |
|
|
|
|
|||||||||||||||||||
| Weighted-average number of ordinary shares outstanding - basic |
|
|
|
|
|||||||||||||||||||
| Net income per share attributable to Eaton ordinary shareholders | |||||||||||||||||||||||
| Diluted | $ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||
| Basic |
|
|
|
|
|||||||||||||||||||
17
Note 12.
FAIR VALUE MEASUREMENTS
Fair value is measured based on an exit price, representing the amount that would be received to sell an asset or paid to satisfy a liability in an orderly transaction between market participants. Fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability. As a basis for considering such assumptions, a fair value hierarchy is established, which categorizes the inputs used in measuring fair value as follows: (Level 1) observable inputs such as quoted prices in active markets; (Level 2) inputs, other than the quoted prices in active markets, that are observable either directly or indirectly; and (Level 3) unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions.
A summary of financial instruments and contingent consideration recognized at fair value, and the fair value measurements used, is as follows:
| (In millions) | Total | Level 1 | Level 2 | Level 3 | |||||||||||||||||||
| September 30, 2022 | |||||||||||||||||||||||
| Cash | $ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||
| Short-term investments |
|
|
|
|
|||||||||||||||||||
| Net derivative contracts |
(
|
|
(
|
|
|||||||||||||||||||
| Contingent consideration from acquisition of Green Motion |
(
|
|
|
(
|
|||||||||||||||||||
| December 31, 2021 | |||||||||||||||||||||||
| Cash | $ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||
| Short-term investments |
|
|
|
|
|||||||||||||||||||
| Net derivative contracts |
|
|
|
|
|||||||||||||||||||
| Contingent consideration from acquisition of Green Motion |
(
|
|
|
(
|
|||||||||||||||||||
Eaton values its financial instruments using an industry standard market approach, in which prices and other relevant information is generated by market transactions involving identical or comparable assets or liabilities.
On March 22, 2021, Eaton acquired Green Motion SA, a leading designer and manufacturer of electric vehicle charging hardware and related software based in Switzerland. Green Motion SA was acquired for $
106
million, including $
49
million of cash paid at closing and $
57
million of estimated fair value of contingent future consideration based on 2023 and 2024 revenue performance. The fair value of contingent consideration liabilities is estimated by discounting contingent payments expected to be made, and may increase or decrease based on changes in revenue estimates and discount rates, with a maximum possible undiscounted value of $
109
million.
Other Fair Value Measurements
Long-term debt and the current portion of long-term debt had a carrying value of $
8,105
million and fair value of $
7,375
million at September 30, 2022 compared to $
8,566
million and $
9,232
million, respectively, at December 31, 2021. The fair value of Eaton's debt instruments were estimated using prevailing market interest rates on debt with similar creditworthiness, terms and maturities and is considered a Level 2 fair value measurement.
18
Note 13.
DERIVATIVE FINANCIAL INSTRUMENTS AND HEDGING ACTIVITIES
In the normal course of business, Eaton is exposed to certain risks related to fluctuations in interest rates, currency exchange rates and commodity prices. The Company uses various derivative and non-derivative financial instruments, primarily interest rate swaps, currency forward exchange contracts, currency swaps and commodity contracts to manage risks from these market fluctuations. The instruments used by Eaton are straightforward, non-leveraged instruments. The counterparties to these instruments are financial institutions with strong credit ratings. Eaton maintains control over the size of positions entered into with any one counterparty and regularly monitors the credit rating of these institutions. Such instruments are not purchased and sold for trading purposes.
Derivative financial instruments are accounted for at fair value and recognized as assets or liabilities in the Consolidated Balance Sheets. Accounting for the gain or loss resulting from the change in the fair value of the derivative financial instrument depends on whether it has been designated, and is effective, as part of a hedging relationship and, if so, as to the nature of the hedging activity. Eaton formally documents all relationships between derivative financial instruments accounted for as designated hedges and the hedged item, as well as its risk-management objective and strategy for undertaking the hedge transaction. This process includes linking derivative financial instruments to a recognized asset or liability, specific firm commitment, forecasted transaction, or net investment in a foreign operation. These financial instruments can be designated as:
•
Hedges of the change in the fair value of a recognized fixed-rate asset or liability, or the firm commitment to acquire such an asset or liability (a fair value hedge); for these hedges, the gain or loss from the derivative financial instrument, as well as the offsetting loss or gain on the hedged item attributable to the hedged risk, are recognized in income during the period of change in fair value.
•
Hedges of the variable cash flows of a recognized variable-rate asset or liability, or the forecasted acquisition of such an asset or liability (a cash flow hedge); for these hedges, the gain or loss from the derivative financial instrument is recognized in Accumulated other comprehensive income and reclassified to income in the same period when the gain or loss on the hedged item is included in income.
•
Hedges of the currency exposure related to a net investment in a foreign operation (a net investment hedge); for these hedges, the gain or loss from the derivative financial instrument is recognized in Accumulated other comprehensive income and reclassified to income in the same period when the gain or loss related to the net investment in the foreign operation is included in income.
The gain or loss from a derivative financial instrument designated as a hedge is classified in the same line of the Consolidated Statements of Income as the offsetting loss or gain on the hedged item. The cash flows resulting from these financial instruments are classified in operating activities on the Condensed Consolidated Statements of Cash Flows.
For derivatives that are not designated as a hedge, any gain or loss is immediately recognized in income. The majority of derivatives used in this manner relate to risks resulting from assets or liabilities denominated in a foreign currency and certain commodity contracts that arise in the normal course of business.
Eaton uses certain of its debt denominated in foreign currency to hedge portions of its net investments in foreign operations against foreign currency exposure (net investment hedges). Foreign currency denominated debt designated as non-derivative net investment hedging instruments had a carrying value on an after-tax basis of $
2,477
million at September 30, 2022 and $
2,880
million at December 31, 2021.
19
Derivative Financial Statement Impacts
The fair value of derivative financial instruments recognized in the Consolidated Balance Sheets is as follows:
| (In millions) |
Notional
amount |
Other
current assets |
Other
noncurrent assets |
Other
current liabilities |
Other
noncurrent liabilities |
Type of
hedge |
Term | ||||||||||||||||||||||||||||||||||
| September 30, 2022 | |||||||||||||||||||||||||||||||||||||||||
| Derivatives designated as hedges | |||||||||||||||||||||||||||||||||||||||||
| Currency exchange contracts | $ |
|
$ |
|
$ |
|
$ |
|
$ |
|
Cash flow |
|
|||||||||||||||||||||||||||||
| Commodity contracts |
|
|
|
|
|
Cash flow |
|
||||||||||||||||||||||||||||||||||
| Total | $ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||||||||||||||||||||
| Derivatives not designated as hedges | |||||||||||||||||||||||||||||||||||||||||
| Currency exchange contracts | $ |
|
$ |
|
$ |
|
|
||||||||||||||||||||||||||||||||||
| December 31, 2021 | |||||||||||||||||||||||||||||||||||||||||
| Derivatives designated as hedges | |||||||||||||||||||||||||||||||||||||||||
|
Fixed-to-floating interest rate
swaps |
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
Fair value |
|
|||||||||||||||||||||||||||||
|
Forward starting floating-to-fixed
interest rate swaps |
|
|
|
|
|
Cash flow |
|
||||||||||||||||||||||||||||||||||
| Currency exchange contracts |
|
|
|
|
|
Cash flow |
|
||||||||||||||||||||||||||||||||||
| Commodity contracts |
|
|
|
|
|
Cash flow |
|
||||||||||||||||||||||||||||||||||
| Total | $ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||||||||||||||||||||
| Derivatives not designated as hedges | |||||||||||||||||||||||||||||||||||||||||
| Currency exchange contracts | $ |
|
$ |
|
$ |
|
|
||||||||||||||||||||||||||||||||||
| Commodity contracts |
|
|
|
|
|||||||||||||||||||||||||||||||||||||
| Total | $ |
|
$ |
|
|||||||||||||||||||||||||||||||||||||
The currency exchange contracts shown in the table above as derivatives not designated as hedges are primarily contracts entered into to manage currency volatility or exposure on intercompany receivables, payables and loans. While Eaton does not elect hedge accounting treatment for these derivatives, Eaton targets managing
100
% of the intercompany balance sheet exposure to minimize the effect of currency volatility related to the movement of goods and services in the normal course of its operations. This activity represents the great majority of these currency exchange contracts. The cash flows resulting from the settlement of these derivatives have been classified in investing activities in the Condensed Consolidated Statement of Cash Flows.
As of September 30, 2022, the volume of outstanding commodity contracts that were entered into to hedge forecasted transactions:
| Commodity | September 30, 2022 | Term | ||||||||||||||||||
| Aluminum |
|
Millions of pounds |
|
|||||||||||||||||
| Copper |
|
Millions of pounds |
|
|||||||||||||||||
| Gold |
|
Troy ounces |
|
|||||||||||||||||
| Silver |
|
Troy ounces |
|
|||||||||||||||||
20
The following amounts were recorded on the Consolidated Balance Sheets related to fixed-to-floating interest rate swaps:
| (In millions) |
Carrying amount of the hedged
assets (liabilities) |
Cumulative amount of fair value hedging adjustment included in the carrying amount of the hedged
asset (liabilities)
(a)
|
|||||||||||||||||||||
| Location on Consolidated Balance Sheets | September 30, 2022 | December 31, 2021 | September 30, 2022 | December 31, 2021 | |||||||||||||||||||
| Long-term debt | $ |
(
|
$ |
(
|
$ |
(
|
$ |
(
|
|||||||||||||||
(a)
At September 30, 2022 and December 31, 2021, these amounts include the cumulative liability amount of fair value hedging adjustments remaining for which the hedge accounting has been discontinued of $
50
million and $
33
million, respectively.
The impact of hedging activities to the Consolidated Statements of Income is as follows:
| Three months ended September 30, 2022 | |||||||||||||||||
| (In millions) | Net Sales | Cost of products sold | Interest expense - net | ||||||||||||||
| Amounts from Consolidated Statements of Income | $ |
|
$ |
|
$ |
|
|||||||||||
| Gain (loss) on derivatives designated as cash flow hedges | |||||||||||||||||
| Forward starting floating-to-fixed interest rate swaps | |||||||||||||||||
| Hedged item | $ |
|
$ |
|
$ |
(
|
|||||||||||
| Derivative designated as hedging instrument |
|
|
|
||||||||||||||
| Currency exchange contracts | |||||||||||||||||
| Hedged item | $ |
|
$ |
(
|
$ |
|
|||||||||||
| Derivative designated as hedging instrument |
(
|
|
|
||||||||||||||
| Commodity contracts | |||||||||||||||||
| Hedged item | $ |
|
$ |
|
$ |
|
|||||||||||
| Derivative designated as hedging instrument |
|
(
|
|
||||||||||||||
| Three months ended September 30, 2021 | |||||||||||||||||
| (In millions) | Net Sales | Cost of products sold | Interest expense - net | ||||||||||||||
| Amounts from Consolidated Statements of Income | $ |
|
$ |
|
$ |
|
|||||||||||
| Gain (loss) on derivatives designated as cash flow hedges | |||||||||||||||||
| Currency exchange contracts | |||||||||||||||||
| Hedged item | $ |
|
$ |
(
|
$ |
|
|||||||||||
| Derivative designated as hedging instrument |
|
|
|
||||||||||||||
| Commodity contracts | |||||||||||||||||
| Hedged item | $ |
|
$ |
(
|
$ |
|
|||||||||||
| Derivative designated as hedging instrument |
|
|
|
||||||||||||||
| Gain (loss) on derivatives designated as fair value hedges | |||||||||||||||||
| Fixed-to-floating interest rate swaps | |||||||||||||||||
| Hedged item | $ |
|
$ |
|
$ |
|
|||||||||||
| Derivative designated as hedging instrument |
|
|
(
|
||||||||||||||
21
| Nine months ended September 30, 2022 | |||||||||||||||||
| (In millions) | Net sales | Cost of products sold | Interest expense - net | ||||||||||||||
| Amounts from Consolidated Statements of Income | $ |
|
$ |
|
$ |
|
|||||||||||
| Gain (loss) on derivatives designated as cash flow hedges | |||||||||||||||||
| Forward starting floating-to-fixed interest rate swaps | |||||||||||||||||
| Hedged item | $ |
|
$ |
|
$ |
(
|
|||||||||||
| Derivative designated as hedging instrument |
|
|
|
||||||||||||||
| Currency exchange contracts | |||||||||||||||||
| Hedged item | $ |
|
$ |
(
|
$ |
|
|||||||||||
| Derivative designated as hedging instrument |
(
|
|
|
||||||||||||||
| Gain (loss) on derivatives designated as fair value hedges | |||||||||||||||||
| Fixed-to-floating interest rate swaps | |||||||||||||||||
| Hedged item | $ |
|
$ |
|
$ |
|
|||||||||||
| Derivative designated as hedging instrument |
|
|
(
|
||||||||||||||
| Nine months ended September 30, 2021 | |||||||||||||||||
| (In millions) | Net sales | Cost of products sold | Interest expense - net | ||||||||||||||
| Amounts from Consolidated Statements of Income | $ |
|
$ |
|
$ |
|
|||||||||||
| Gain (loss) on derivatives designated as cash flow hedges | |||||||||||||||||
| Currency exchange contracts | |||||||||||||||||
| Hedged item | $ |
|
$ |
(
|
$ |
|
|||||||||||
| Derivative designated as hedging instrument |
(
|
|
|
||||||||||||||
| Commodity contracts | |||||||||||||||||
| Hedged item | $ |
|
$ |
(
|
$ |
|
|||||||||||
| Derivative designated as hedging instrument |
|
|
|
||||||||||||||
| Gain (loss) on derivatives designated as fair value hedges | |||||||||||||||||
| Fixed-to-floating interest rate swaps | |||||||||||||||||
| Hedged item | $ |
|
$ |
|
$ |
|
|||||||||||
| Derivative designated as hedging instrument |
|
|
(
|
||||||||||||||
22
The impact of derivatives not designated as hedges to the Consolidated Statements of Income is as follows:
| Gain (loss) recognized in Consolidated Statements of Income | Consolidated Statements of Income classification | ||||||||||||||||
|
Three months ended
September 30 |
|||||||||||||||||
| (In millions) | 2022 | 2021 | |||||||||||||||
| Gain (loss) on derivatives not designated as hedges | |||||||||||||||||
| Currency exchange contracts | $ |
(
|
$ |
(
|
Interest expense - net | ||||||||||||
| Commodity contracts |
|
|
Other expense (income) - net and Cost of products sold
(a)
|
||||||||||||||
| Total | $ |
(
|
$ |
(
|
|||||||||||||
| Gain (loss) recognized in Consolidated Statements of Income | Consolidated Statements of Income classification | ||||||||||||||||
|
Nine months ended
September 30 |
|||||||||||||||||
| (In millions) | 2022 | 2021 | |||||||||||||||
| Gain (loss) on derivatives not designated as hedges | |||||||||||||||||
| Currency exchange contracts | $ |
(
|
$ |
(
|
Interest expense - net | ||||||||||||
| Commodity contracts |
(
|
|
Other expense (income) - net and Cost of products sold
(a)
|
||||||||||||||
| Total | $ |
(
|
$ |
|
|||||||||||||
23
The impact of derivative and non-derivative instruments designated as hedges to the Consolidated Statements of Income and Comprehensive Income is as follows:
|
Gain (loss) recognized in
other comprehensive (loss) income |
Location of gain (loss)
reclassified from Accumulated other comprehensive loss |
Gain (loss) reclassified
from Accumulated other comprehensive loss |
|||||||||||||||||||||||||||
|
Three months ended
September 30 |
Three months ended
September 30 |
||||||||||||||||||||||||||||
| (In millions) | 2022 | 2021 | 2022 | 2021 | |||||||||||||||||||||||||
|
Derivatives designated as
cash flow hedges |
|||||||||||||||||||||||||||||
|
Forward starting floating-to-fixed
interest rate swaps |
$ |
(
|
$ |
|
Interest expense - net | $ |
|
$ |
|
||||||||||||||||||||
| Currency exchange contracts |
(
|
(
|
Net sales and Cost of products sold |
(
|
|
||||||||||||||||||||||||
| Commodity contracts |
(
|
(
|
Cost of products sold |
(
|
|
||||||||||||||||||||||||
|
Non-derivative designated as net
investment hedges |
|||||||||||||||||||||||||||||
| Foreign currency denominated debt |
|
|
Interest expense - net |
|
|
||||||||||||||||||||||||
| Total | $ |
|
$ |
|
$ |
(
|
$ |
|
|||||||||||||||||||||
|
Gain (loss) recognized in
other comprehensive (loss) income |
Location of gain (loss)
reclassified from Accumulated other comprehensive loss |
Gain (loss) reclassified
from Accumulated other comprehensive loss |
|||||||||||||||||||||||||||
|
Nine months ended
September 30 |
Nine months ended
September 30 |
||||||||||||||||||||||||||||
| (In millions) | 2022 | 2021 | 2022 | 2021 | |||||||||||||||||||||||||
|
Derivatives designated as cash
flow hedges |
|||||||||||||||||||||||||||||
|
Forward starting floating-to-fixed
interest rate swaps |
$ |
|
$ |
|
Interest expense - net | $ |
|
$ |
|
||||||||||||||||||||
| Currency exchange contracts |
(
|
(
|
Net sales and Cost of products sold |
|
(
|
||||||||||||||||||||||||
| Commodity contracts |
(
|
|
Cost of products sold |
|
|
||||||||||||||||||||||||
|
Non-derivative designated as net
investment hedges |
|||||||||||||||||||||||||||||
| Foreign currency denominated debt |
|
|
Interest expense - net |
|
|
||||||||||||||||||||||||
| Total | $ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||||||||
At September 30, 2022, a loss of $
5
million of estimated unrealized net gains or losses associated with our cash flow hedges were expected to be reclassified to income from Accumulated other comprehensive loss within the next twelve months. These reclassifications relate to our designated foreign currency and commodity hedges that will mature in the next 12 months.
24
Note 14.
RESTRUCTURING CHARGES
In the second quarter of 2020, Eaton decided to undertake a multi-year restructuring program to reduce its cost structure and gain efficiencies in its business segments and at corporate in order to respond to declining market conditions brought on by the COVID-19 pandemic. Since the inception of the program, the Company has incurred charges of $
341
million. These restructuring activities are expected to incur additional expenses of approximately $
9
million in 2022 primarily comprised of plant closing and other costs, resulting in total estimated charges of $
350
million for the entire program.
A summary of restructuring program charges is as follows:
|
Three months ended
September 30 |
Nine months ended
September 30 |
||||||||||||||||||||||
| (In millions except for per share data) | 2022 | 2021 | 2022 | 2021 | |||||||||||||||||||
| Workforce reductions | $ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||
| Plant closing and other |
|
|
|
|
|||||||||||||||||||
| Total before income taxes |
|
|
|
|
|||||||||||||||||||
| Income tax benefit |
|
|
|
|
|||||||||||||||||||
| Total after income taxes | $ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||
| Per ordinary share - diluted | $ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||
Restructuring program charges related to the following segments:
|
Three months ended
September 30 |
Nine months ended
September 30 |
||||||||||||||||||||||
| (In millions) | 2022 | 2021 | 2022 | 2021 | |||||||||||||||||||
| Electrical Americas | $ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||
| Electrical Global |
|
|
|
|
|||||||||||||||||||
| Aerospace |
|
|
|
|
|||||||||||||||||||
| Vehicle |
|
|
|
|
|||||||||||||||||||
| eMobility |
|
|
|
|
|||||||||||||||||||
| Corporate |
|
|
|
|
|||||||||||||||||||
| Total | $ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||
A summary of liabilities related to workforce reductions, plant closing and other associated costs is as follows:
| (In millions) | Workforce reductions | Plant closing and other | Total | ||||||||||||||
| Balance at January 1, 2020 | $ |
|
$ |
|
$ |
|
|||||||||||
| Liability recognized |
|
|
|
||||||||||||||
| Payments, utilization and translation |
(
|
(
|
(
|
||||||||||||||
| Balance at December 31, 2020 | $ |
|
$ |
|
$ |
|
|||||||||||
| Liability recognized |
|
|
|
||||||||||||||
| Payments, utilization and translation |
(
|
(
|
(
|
||||||||||||||
| Balance at December 31, 2021 | $ |
|
$ |
|
$ |
|
|||||||||||
| Liability recognized |
|
|
|
||||||||||||||
| Payments, utilization and translation |
(
|
(
|
(
|
||||||||||||||
| Balance at September 30, 2022 | $ |
|
$ |
|
$ |
|
|||||||||||
These restructuring program charges were included in Cost of products sold, Selling and administrative expense, Research and development expense, or Other expense (income) - net, as appropriate. In Business Segment Information, these restructuring program charges are treated as Corporate items. See Note 15 for additional information about business segments.
25
Note 15.
BUSINESS SEGMENT INFORMATION
Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated on a regular basis by the chief operating decision maker, or decision making group, in deciding how to allocate resources to an individual segment and in assessing performance. Eaton's operating segments are Electrical Americas, Electrical Global, Aerospace, Vehicle, and eMobility. On August 2, 2021, Eaton completed the sale of the Hydraulics business. Operating profit includes the operating profit from intersegment sales. For additional information regarding Eaton's business segments, see Note 17 to the Consolidated Financial Statements contained in the 2021 Form 10-K.
|
Three months ended
September 30 |
Nine months ended
September 30 |
||||||||||||||||||||||
| (In millions) | 2022 | 2021 | 2022 | 2021 | |||||||||||||||||||
| Net sales | |||||||||||||||||||||||
| Electrical Americas | $ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||
| Electrical Global |
|
|
|
|
|||||||||||||||||||
| Hydraulics |
|
|
|
|
|||||||||||||||||||
| Aerospace |
|
|
|
|
|||||||||||||||||||
| Vehicle |
|
|
|
|
|||||||||||||||||||
| eMobility |
|
|
|
|
|||||||||||||||||||
| Total net sales | $ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||
| Segment operating profit (loss) | |||||||||||||||||||||||
| Electrical Americas | $ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||
| Electrical Global |
|
|
|
|
|||||||||||||||||||
| Hydraulics |
|
|
|
|
|||||||||||||||||||
| Aerospace |
|
|
|
|
|||||||||||||||||||
| Vehicle |
|
|
|
|
|||||||||||||||||||
| eMobility |
(
|
(
|
(
|
(
|
|||||||||||||||||||
| Total segment operating profit |
|
|
|
|
|||||||||||||||||||
| Corporate | |||||||||||||||||||||||
| Intangible asset amortization expense |
(
|
(
|
(
|
(
|
|||||||||||||||||||
| Interest expense - net |
(
|
(
|
(
|
(
|
|||||||||||||||||||
| Pension and other postretirement benefits income |
|
|
|
|
|||||||||||||||||||
| Restructuring program charges |
(
|
(
|
(
|
(
|
|||||||||||||||||||
| Other income (expense) - net |
(
|
|
(
|
(
|
|||||||||||||||||||
| Income before income taxes |
|
|
|
|
|||||||||||||||||||
| Income tax expense |
|
|
|
|
|||||||||||||||||||
| Net income |
|
|
|
|
|||||||||||||||||||
| Less net income for noncontrolling interests |
(
|
(
|
(
|
(
|
|||||||||||||||||||
| Net income attributable to Eaton ordinary shareholders | $ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||
26
ITEM 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
Amounts are in millions of dollars or shares unless indicated otherwise (per share data assume dilution). Columns and rows may not add and the sum of components may not equal total amounts reported due to rounding.
COMPANY OVERVIEW
Eaton Corporation plc (Eaton or the Company) is an intelligent power management company dedicated to improving the quality of life and protecting the environment for people everywhere. We are guided by our commitment to do business right, to operate sustainably and to help our customers manage power – today and well into the future. By capitalizing on the global growth trends of electrification and digitalization, we're accelerating the planet's transition to renewable energy, helping to solve the world's most urgent power management challenges, and doing what's best for our stakeholders and all of society.
Eaton’s businesses are well-positioned to take advantage of secular growth trends related to the energy transition from fossil fuels to renewables. We are responding to these trends by innovating solutions that transform the electrical power value chain, investing in electrical vehicle markets, increasing our focus on electrification, and employing digital technologies for power management. The Company’s innovations are expected to enable the integration of renewables and sustainability solutions, with new types of equipment, services, and software. These strategic focus areas are an important part of our response to climate change.
Founded in 1911, Eaton has been listed on the New York Stock Exchange for nearly a century. We reported revenues of $19.6 billion in 2021 and serve customers in more than 170 countries.
27
Portfolio Changes
The Company continues to actively manage its portfolio of businesses to deliver on its strategic objectives. The Company is focused on deploying its capital toward businesses that provide opportunities for above-market growth, strong returns, and align with secular trends and its power management strategies. During 2021 and 2022, Eaton has completed a number of transactions to strengthen its portfolio.
| Acquisitions of businesses and investments in associate companies | Date of acquisition | Business segment | ||||||||||||
| Tripp Lite | March 17, 2021 | Electrical Americas | ||||||||||||
|
A leading supplier of power quality products and connectivity solutions including single-phase uninterruptible power supply systems, rack power distribution units, surge protectors, and enclosures for data centers, industrial, medical, and communications markets in the Americas.
|
||||||||||||||
| Green Motion SA | March 22, 2021 | Electrical Global | ||||||||||||
|
A leading designer and manufacturer of electric vehicle charging hardware and related software.
|
||||||||||||||
| HuanYu High Tech | March 29, 2021 | Electrical Global | ||||||||||||
|
A 50 percent stake in HuanYu High Tech, a subsidiary of HuanYu Group that manufactures and markets low-voltage circuit breakers and contactors in China, and throughout the Asia-Pacific region.
|
||||||||||||||
| Mission Systems | June 1, 2021 | Aerospace | ||||||||||||
|
A leading manufacturer of air-to-air refueling systems, environmental systems, and actuation primarily for defense markets.
|
||||||||||||||
| Jiangsu YiNeng Electric's busway business | June 25, 2021 | Electrical Global | ||||||||||||
|
A 50 percent stake in Jiangsu YiNeng Electric's busway business which manufactures and markets busway products in China.
|
||||||||||||||
| Royal Power Solutions | January 5, 2022 | eMobility | ||||||||||||
|
A manufacturer of high-precision electrical connectivity components used in electric vehicle, energy management, industrial and mobility markets.
|
||||||||||||||
| Jiangsu Huineng Electric Co., Ltd’s circuit breaker business | July 1, 2022 | Electrical Global | ||||||||||||
|
A 50 percent stake in Jiangsu Huineng Electric Co., Ltd's circuit breaker business which manufactures and markets low-voltage circuit breakers in China.
|
||||||||||||||
| Divestiture of business | Date of divestiture | Business segment | ||||||||||||
|
Hydraulics business
|
August 2, 2021 | Hydraulics | ||||||||||||
Additional information related to acquisitions and divestiture of businesses is presented in Note 2.
28
Restructuring
In the second quarter of 2020, Eaton decided to undertake a multi-year restructuring program to reduce its cost structure and gain efficiencies in its business segments and at corporate in order to respond to declining market conditions brought on by the COVID-19 pandemic. Since the inception of the program, the Company has incurred charges of $341 million. These restructuring activities are expected to incur additional expenses of approximately $9 million in 2022 primarily comprised of plant closing and other costs, resulting in total estimated charges of $350 million for the entire program. The projected mature year savings from these restructuring actions are expected to be $250 million when fully implemented in 2023. Additional information related to this restructuring is presented in Note 14.
Summary of Results of Operations
A summary of Eaton’s Net sales, Net income attributable to Eaton ordinary shareholders, and Net income per share attributable to Eaton ordinary shareholders - diluted is as follows:
|
Three months ended
September 30 |
Nine months ended
September 30 |
||||||||||||||||||||||
| (In millions except for per share data) | 2022 | 2021 | 2022 | 2021 | |||||||||||||||||||
| Net sales | $ | 5,313 | $ | 4,923 | $ | 15,368 | $ | 14,830 | |||||||||||||||
| Net income attributable to Eaton ordinary shareholders | 607 | 629 | 1,741 | 1,593 | |||||||||||||||||||
| Net income per share attributable to Eaton ordinary shareholders - diluted | $ | 1.52 | $ | 1.57 | $ | 4.34 | $ | 3.97 | |||||||||||||||
RESULTS OF OPERATIONS
Non-GAAP Financial Measures
The following discussion of Consolidated Financial Results includes certain non-GAAP financial measures. These financial measures include adjusted earnings and adjusted earnings per ordinary share, each of which differs from the most directly comparable measure calculated in accordance with generally accepted accounting principles (GAAP). A reconciliation of adjusted earnings and adjusted earnings per ordinary share to the most directly comparable GAAP measure is included in the Consolidated Financial Results table below. Management believes that these financial measures are useful to investors because they provide additional meaningful financial information that should be considered when assessing our business performance and trends, and they allow investors to more easily compare Eaton’s financial performance period to period. Management uses this information in monitoring and evaluating the on-going performance of Eaton.
29
Acquisition and Divestiture Charges and Income
Eaton incurs integration charges and transaction costs to acquire and integrate businesses, and transaction, separation and other costs to divest and exit businesses. Eaton also recognizes gains and losses on the sale of businesses. A summary of these Corporate items is as follows:
|
Three months ended
September 30 |
Nine months ended
September 30 |
||||||||||||||||||||||
| (In millions except for per share data) | 2022 | 2021 | 2022 | 2021 | |||||||||||||||||||
| Acquisition integration, divestiture charges and transaction costs | $ | 103 | $ | 179 | $ | 182 | $ | 312 | |||||||||||||||
| Gain on the sale of the Hydraulics business | — | (617) | (24) | (617) | |||||||||||||||||||
| Total charges (income) before income taxes | 103 | (438) | 158 | (305) | |||||||||||||||||||
| Income tax expense (benefit) | (17) | 386 | (25) | 362 | |||||||||||||||||||
| Total charges (income) after income taxes | $ | 86 | $ | (52) | $ | 133 | $ | 57 | |||||||||||||||
| Charges (income) per ordinary share - diluted | $ | 0.21 | $ | (0.13) | $ | 0.33 | $ | 0.14 | |||||||||||||||
Acquisition integration, divestiture charges and transaction costs in 2022 are primarily related to the acquisitions of Royal Power Solutions, Souriau-Sunbank Connection Technologies, Green Motion, Tripp Lite, and Mission Systems, and other charges to acquire and exit businesses including certain indemnity claims associated with the sale of 50% interest in the commercial vehicle automated transmission business in 2017. These costs also included charges of $29 million presented in Other expense (income) - net on the Consolidated Statements of Income related to the decision in the second quarter to exit the Company's business operations in Russia. These charges consisted primarily of write-downs of accounts receivable, inventory and other assets, and accruals for severance. Charges in 2021 are primarily related to the divestiture of the Hydraulics business, the acquisitions of Tripp Lite, Mission Systems, Souriau-Sunbank Connection Technologies, and Ulusoy Elektrik Imalat Taahhut ve Ticaret A.S., and other charges to acquire and exit businesses including certain indemnity claims associated with the sale of 50% interest in the commercial vehicle automated transmission business in 2017. These charges were included in Cost of products sold, Selling and administrative expense, Research and development expense, or Other expense (income) - net. In Business Segment Information in Note 15, the charges were included in Other income (expense) - net.
Intangible Asset Amortization Expense
Intangible asset amortization expense is as follows:
|
Three months ended
September 30 |
Nine months ended
September 30 |
||||||||||||||||||||||
| (In millions except for per share data) | 2022 | 2021 | 2022 | 2021 | |||||||||||||||||||
| Intangible asset amortization expense | $ | 124 | $ | 126 | $ | 375 | $ | 326 | |||||||||||||||
| Income tax benefit | 27 | 27 | 80 | 56 | |||||||||||||||||||
| Total after income taxes | $ | 97 | $ | 99 | $ | 295 | $ | 270 | |||||||||||||||
| Per ordinary share - diluted | $ | 0.25 | $ | 0.25 | $ | 0.74 | $ | 0.68 | |||||||||||||||
30
Consolidated Financial Results
|
Three months ended
September 30 |
Increase (decrease) |
Nine months ended
September 30 |
Increase (decrease) | ||||||||||||||||||||||||||||||||
| (In millions except for per share data) | 2022 | 2021 | 2022 | 2021 | |||||||||||||||||||||||||||||||
| Net sales | $ | 5,313 | $ | 4,923 | 8 | % | $ | 15,368 | $ | 14,830 | 4 | % | |||||||||||||||||||||||
| Gross profit | 1,768 | 1,585 | 12 | % | 5,049 | 4,763 | 6 | % | |||||||||||||||||||||||||||
| Percent of net sales | 33.3 | % | 32.2 | % | 32.9 | % | 32.1 | % | |||||||||||||||||||||||||||
| Income before income taxes | 720 | 1,113 | (35) | % | 2,060 | 2,271 | (9) | % | |||||||||||||||||||||||||||
| Net income | 608 | 630 | (3) | % | 1,743 | 1,595 | 9 | % | |||||||||||||||||||||||||||
| Less net income for noncontrolling interests | (1) | (1) | (2) | (2) | |||||||||||||||||||||||||||||||
| Net income attributable to Eaton ordinary shareholders | 607 | 629 | (3) | % | 1,741 | 1,593 | 9 | % | |||||||||||||||||||||||||||
| Excluding acquisition and divestiture charges (income), after-tax | 86 | (52) | 133 | 57 | |||||||||||||||||||||||||||||||
| Excluding restructuring program charges, after-tax | 18 | 25 | 39 | 48 | |||||||||||||||||||||||||||||||
| Excluding intangible asset amortization expense, after-tax | 97 | 99 | 295 | 270 | |||||||||||||||||||||||||||||||
| Adjusted earnings | $ | 807 | $ | 701 | 15 | % | $ | 2,207 | $ | 1,968 | 12 | % | |||||||||||||||||||||||
| Net income per share attributable to Eaton ordinary shareholders - diluted | $ | 1.52 | $ | 1.57 | (3) | % | $ | 4.34 | $ | 3.97 | 9 | % | |||||||||||||||||||||||
| Excluding per share impact of acquisition and divestiture charges (income), after-tax | 0.21 | (0.13) | 0.33 | 0.14 | |||||||||||||||||||||||||||||||
| Excluding per share impact of restructuring program charges, after-tax | 0.04 | 0.06 | 0.10 | 0.12 | |||||||||||||||||||||||||||||||
| Excluding per share impact of intangible asset amortization expense, after-tax | 0.25 | 0.25 | 0.74 | 0.68 | |||||||||||||||||||||||||||||||
| Adjusted earnings per ordinary share | $ | 2.02 | $ | 1.75 | 15 | % | $ | 5.51 | $ | 4.91 | 12 | % | |||||||||||||||||||||||
Net Sales
| Changes in Net sales are summarized as follows: |
Three months ended
September 30 |
Nine months ended
September 30 |
|||||||||
| 2022 | 2022 | ||||||||||
| Organic growth | 15 | % | 12 | % | |||||||
|
Acquisitions of businesses
|
1 | % | 3 | % | |||||||
| Divestiture of business | (4) | % | (9) | % | |||||||
| Foreign currency | (4) | % | (2) | % | |||||||
| Total increase (decrease) in Net sales | 8 | % | 4 | % | |||||||
Organic sales increased 15% in the third quarter and 12% in the
first
nine months of 2022 due
to
broad-based strength in end-markets of the Electrical Americas and Electrical Global business segments, strength in sales to commercial OEM and aftermarket in the Aerospace business segment, and higher sales volumes including inflationary recovery in the Vehicle business segment.
Despite strong growth, many of our businesses continue to be impacted by operating inefficiencies due to supply chain constraints or shortages, inflation, and selective labor shortages.
The acquisition of Royal Power Solutions increased sales in the
third quarter of 2022 and the acquisitions of Tripp Lite, Mission Systems, and Royal Power Solutions increased sales in the first nine months of 2022. The divestiture of the Hydraulics business reduced sales in the third quarter and first nine months of 2022.
Gross Profit
Gross profit margin increased from 32.2% in the third quarter of 2021 to 33.3% in the third quarter of 2022 and from 32.1% in the first nine months of 2021 to 32.9% in the first nine months of 2022 primarily du
e to higher organic sales, including favorable pricing recovery. Gross profit also improved due to the net impact of the acquisition of Royal Power Solutions and the divestiture of the Hydraulics business. Conversely, commodity and logistics inflation and operating inefficiencies due to supply chain constraints had an unfavorable impact on gross margin during the third quarter and first nine months of 2022, despite offsetting pricing actions.
31
Income Taxes
The effective income tax rate for the third quarter of 2022 was expense of 15.5% compared to expense of 43.4% for the third quarter of 2021. The effective income tax rate for the first nine months of 2022 was expense of 15.4% compared to expense of 29.8% for the first nine months of 2021. The decrease in the effective tax rate in the third quarter and first nine months of 2022 was primarily due to the one-time tax impact on the gain from the sale of the Hydraulics business in the third quarter of 2021 discussed in Note 2.
Net Income
Net income attributable to Eaton ordinary shareholders of $607 million in the third quarter of 2022 decreased 3% compared to Net income attributable to Eaton ordinary shareholders of $629 million in the third quarter of 2021.
Net i
ncome attributable to Eaton ordinary shareholders of $1,741 million in the first nine months of 2022 increased 9% compared to Net income attributable to Eaton ordinary shareholders of $1,593 million in the first nine months of 2021. Net income in the third quarter and first nine months of 2021 included an after-tax gain of $197 million on the sale of the Hydraulics business. Excluding this gain, the increase in the third quarter and first nine months of 2022 was pri
marily due to higher gross profit, lower acquisition and divestiture charges, and a net improvement in other income which included gains from the sale of certain office and distribution facilities, partially offset by higher income tax expense.
Net income per ordinary share decreased to $1.52 in the third quarter of 2022 compared to $1.57 in the third quarter of 2021. Net income per ordinary share increased to $4.34 in the first nine months of 2022 compared to $3.97 in the first nine months of 2022. Net income per ordinary share in the third quarter and first nine months of 2021 include
d $0.49 from
the sale o
f the Hydraulics business. Excluding this gain, the increase in Net income per ordinary share in the third quarter and
first nine months
of 2022 was due to higher Net income attributable to Eaton ordinary shareholders and the impact of the Company's share repurchases over the past year.
Adjusted Earnings
Adjusted earnings of $807 million in the third quarter of 2022 increased 15% compared to Adjusted earnings of $701 million in the third quarter of 2021. Adjusted earnings of $2,207 million in the first nine months of 2022 increased 12% compared to Adjusted earnings of $1,968 million in the first nine months of 2021. The increase in Adjusted earnings in the third quarter and first nine months of 2022 was primarily du
e to higher Net income attributable to Eaton ordinary shareholders, adjusted for acquisition and divestiture charges, restructuring program charges, and intangible asset amortization expense.
Adjusted earnings per ordinary share increased to $2.02 in the third quarter of 2022 compared to $1.75 in the third quarter of 2021. Adjusted earnings per ordinary share increased to $5.51 in the first nine months of 2022 compared to $4.91 in the first nine months of 2022. The increase
in Adjusted earnings per ordinary share in the third quarter and first nine months of 2022 was due to higher Adjusted earnings and the impact of the Company's share repurchases over the past year.
32
Business Segment Results of Operations
The following is a discussion of Net sales, operating profit and operating margin by business segment.
Electrical Americas
|
Three months ended
September 30 |
Increase (decrease) |
Nine months ended
September 30 |
Increase (decrease) | ||||||||||||||||||||||||||||||||
| (In millions) | 2022 | 2021 | 2022 | 2021 | |||||||||||||||||||||||||||||||
| Net sales | $ | 2,179 | $ | 1,854 | 18 | % | $ | 6,201 | $ | 5,325 | 16 | % | |||||||||||||||||||||||
| Operating profit | $ | 511 | $ | 402 | 27 | % | $ | 1,368 | $ | 1,127 | 21 | % | |||||||||||||||||||||||
| Operating margin | 23.5 | % | 21.7 | % | 22.1 | % | 21.2 | % | |||||||||||||||||||||||||||
| Changes in Net sales are summarized as follows: |
Three months ended
September 30 |
Nine months ended
September 30 |
|||||||||||||||||||||||||||||||||
| 2022 | 2022 | ||||||||||||||||||||||||||||||||||
| Organic growth | 18 | % | 15 | % | |||||||||||||||||||||||||||||||
|
Acquisition of Tripp Lite
|
— | % | 2 | % | |||||||||||||||||||||||||||||||
| Foreign currency | — | % | (1) | % | |||||||||||||||||||||||||||||||
| Total increase (decrease) in Net sales | 18 | % | 16 | % | |||||||||||||||||||||||||||||||
The increase in organic sales reflects broad-based strength in end-markets, with particular strength in commercial, residential, industrial, and utility end-markets in the third quarter of 2022, and commercial, residential, and industrial end-markets in the first nine months of 2022.
The operating margin increased from 21.7% in the third quarter of 2021 to 23.5% in the third quarter of 2022 and from 21.2% in the first nine months of 2021 to 22.1% in the first nine months of 2022 primarily due to higher sales volumes including favorable pricing recovery, while headwinds from commodity and logistics inflation and operating inefficiencies due to supply chain constraints were offset by gains from the sale of certain office and distribution facilities.
Electrical Global
|
Three months ended
September 30 |
Increase (decrease) |
Nine months ended
September 30 |
Increase (decrease) | ||||||||||||||||||||||||||||||||
| (In millions) | 2022 | 2021 | 2022 | 2021 | |||||||||||||||||||||||||||||||
| Net sales | $ | 1,486 | $ | 1,421 | 5 | % | $ | 4,418 | $ | 4,092 | 8 | % | |||||||||||||||||||||||
| Operating profit | $ | 305 | $ | 285 | 7 | % | $ | 866 | $ | 757 | 14 | % | |||||||||||||||||||||||
| Operating margin | 20.6 | % | 20.1 | % | 19.6 | % | 18.5 | % | |||||||||||||||||||||||||||
| Changes in Net sales are summarized as follows: |
Three months ended
September 30 |
Nine months ended
September 30 |
|||||||||||||||||||||||||||||||||
| 2022 | 2022 | ||||||||||||||||||||||||||||||||||
| Organic growth | 13 | % | 14 | % | |||||||||||||||||||||||||||||||
| Foreign currency | (8) | % | (6) | % | |||||||||||||||||||||||||||||||
| Total increase (decrease) in Net sales | 5 | % | 8 | % | |||||||||||||||||||||||||||||||
The increase in organic sales in the third quarter and first nine months of 2022 was primarily due to broad-based strength in end-markets, with particular strength in data center, commercial and industrial end-markets.
The operating margin increased from 20.1% in the third quarter of 2021 to 20.6% in the third quarter of 2022 and from 18.5% in the first nine months of 2021 to 19.6% in the first nine months of 2022 primarily due to higher sales volumes including favorable pricing recovery, partially offset by commodity and logistics inflation and operating inefficiencies due to supply chain constraints.
33
Hydraulics
On August 2, 2021, Eaton completed the sale of the Hydraulics business segment. For the third quarter and first nine months ended September 30, 2021, the Hydraulics segment generated net sales of $179 million and $1,300 million, respectively, and operating profit of $20 million and $177 million, respectively.
Aerospace
|
Three months ended
September 30 |
Increase (decrease) |
Nine months ended
September 30 |
Increase (decrease) | ||||||||||||||||||||||||||||||||
| (In millions) | 2022 | 2021 | 2022 | 2021 | |||||||||||||||||||||||||||||||
| Net sales | $ | 768 | $ | 745 | 3 | % | $ | 2,227 | $ | 1,889 | 18 | % | |||||||||||||||||||||||
| Operating profit | $ | 185 | $ | 164 | 13 | % | $ | 506 | $ | 391 | 29 | % | |||||||||||||||||||||||
| Operating margin | 24.0 | % | 22.0 | % | 22.7 | % | 20.7 | % | |||||||||||||||||||||||||||
| Changes in Net sales are summarized as follows: |
Three months ended
September 30 |
Nine months ended
September 30 |
|||||||||||||||||||||||||||||||||
| 2022 | 2022 | ||||||||||||||||||||||||||||||||||
| Organic growth | 8 | % | 11 | % | |||||||||||||||||||||||||||||||
|
Acquisition of Mission Systems
|
— | % | 11 | % | |||||||||||||||||||||||||||||||
| Foreign currency | (5) | % | (4) | % | |||||||||||||||||||||||||||||||
| Total increase (decrease) in Net sales | 3 | % | 18 | % | |||||||||||||||||||||||||||||||
The increase in organic sales in the third quarter and first nine months of 2022 was primarily due to strength in sales to commercial OEM and aftermarket.
The operating margin increased from 22.0% in the third quarter of 2021 to 24.0% in the third quarter of 2022 and from 20.7% in the first nine months of 2021 to 22.7% in the first nine months of 2022 primarily due to higher organic sales volumes.
Vehicle
|
Three months ended
September 30 |
Increase (decrease) |
Nine months ended
September 30 |
Increase (decrease) | ||||||||||||||||||||||||||||||||
| (In millions) | 2022 | 2021 | 2022 | 2021 | |||||||||||||||||||||||||||||||
| Net sales | $ | 744 | $ | 640 | 16 | % | $ | 2,123 | $ | 1,969 | 8 | % | |||||||||||||||||||||||
| Operating profit | $ | 125 | $ | 115 | 9 | % | $ | 346 | $ | 349 | (1) | % | |||||||||||||||||||||||
| Operating margin | 16.8 | % | 18.0 | % | 16.3 | % | 17.7 | % | |||||||||||||||||||||||||||
| Changes in Net sales are summarized as follows: |
Three months ended
September 30 |
Nine months ended
September 30 |
|||||||||||||||||||||||||||||||||
| 2022 | 2022 | ||||||||||||||||||||||||||||||||||
| Organic growth | 19 | % | 10 | % | |||||||||||||||||||||||||||||||
| Foreign currency | (3) | % | (2) | % | |||||||||||||||||||||||||||||||
| Total increase (decrease) in Net sales | 16 | % | 8 | % | |||||||||||||||||||||||||||||||
The increase in organic sales in the third quarter and first nine months of 2022 was primarily due to strength in the North American truck and light vehicle markets, and South American truck, bus and agriculture markets.
The operating margin decreased from 18.0% in the third quarter of 2021 to 16.8% in the third quarter of 2022 and from 17.7% in the first nine months of 2021 to 16.3% in the first nine months of 2022 primarily due to commodity and logistics inflation and operating inefficiencies due to supply chain constraints, partially offset by higher sales volumes including inflationary recovery.
34
eMobility
|
Three months ended
September 30 |
Increase (decrease) |
Nine months ended
September 30 |
Increase (decrease) | ||||||||||||||||||||||||||||||||
| (In millions) | 2022 | 2021 | 2022 | 2021 | |||||||||||||||||||||||||||||||
| Net sales | $ | 137 | $ | 84 | 63 | % | $ | 399 | $ | 255 | 56 | % | |||||||||||||||||||||||
| Operating profit (loss) | $ | (2) | $ | (8) | 75 | % | $ | (7) | $ | (21) | 67 | % | |||||||||||||||||||||||
| Operating margin | (1.5) | % | (9.5) | % | (1.7) | % | (8.2) | % | |||||||||||||||||||||||||||
| Changes in Net sales are summarized as follows: |
Three months ended
September 30 |
Nine months ended
September 30 |
|||||||||||||||||||||||||||||||||
| 2022 | 2022 | ||||||||||||||||||||||||||||||||||
| Organic growth | 17 | % | 11 | % | |||||||||||||||||||||||||||||||
|
Acquisition of Royal Power Solutions
|
49 | % | 47 | % | |||||||||||||||||||||||||||||||
| Foreign currency | (3) | % | (2) | % | |||||||||||||||||||||||||||||||
| Total increase (decrease) in Net sales | 63 | % | 56 | % | |||||||||||||||||||||||||||||||
The increase in organic sales in the third quarter and first nine months of 2022 was due to strength in all regions.
The operating margin increased from negative 9.5% in the third quarter of 2021 to negative 1.5% in the third quarter of 2022 and from negative 8.2% in the first nine months of 2021 to negative 1.7% in the first nine months of 2022 primarily due to higher organic sales volumes and the acquisition of Royal Power Solutions.
Corporate Expense (Income)
|
Three months ended
September 30 |
Increase (decrease) |
Nine months ended
September 30 |
Increase (decrease) | ||||||||||||||||||||||||||||||||
| (In millions) | 2022 | 2021 | 2022 | 2021 | |||||||||||||||||||||||||||||||
| Intangible asset amortization expense | $ | 124 | $ | 126 | (2) | % | $ | 375 | $ | 326 | 15 | % | |||||||||||||||||||||||
| Interest expense - net | 37 | 37 | — | % | 100 | 112 | (11) | % | |||||||||||||||||||||||||||
| Pension and other postretirement benefits income | (7) | (14) | (50) | % | (35) | (44) | (20) | % | |||||||||||||||||||||||||||
| Restructuring program charges | 22 | 34 | (35) | % | 49 | 63 | (22) | % | |||||||||||||||||||||||||||
| Other (income) expense - net | 227 | (318) | (171) | % | 529 | 52 | 917 | % | |||||||||||||||||||||||||||
| Total corporate (income) expense | $ | 403 | $ | (135) | (399) | % | $ | 1,018 | $ | 509 | 100 | % | |||||||||||||||||||||||
Total corporate expense was $403 million in the third quarter of 2022 compared to Total corporate income of $135 million in the third quarter of 2021. The changes in Total corporate (income) expense for the third quarter of 2022 were primarily due to the change i
n Other (income) expense - net, driven by the 2021 gain on sale of the Hydraulics business discussed in Note 2, partially offset by lower acquisition and divestiture charges.
Total corporate expense was $1,018 million in the first nine months of 2022 compared to $509 million in the first nine months of 2021. T
he increase in Total corporate expense for the first nine months of 2022 was primarily due to higher Other expense - net and Intangible asset amortization expense. The increase in Other expense - net is primarily due to the 2021 gain on sale of the Hydraulics business discussed in Note 2, partially offset by lower acquisition and divestiture charges.
35
LIQUIDITY, CAPITAL RESOURCES, AND FINANCIAL CONDITION
Liquidity and Financial Condition
Eaton’s objective is to finance its business through operating cash flow and an appropriate mix of equity and long-term and short-term debt. By diversifying its debt maturity structure, Eaton reduces liquidity risk.
On August 23, 2022, a subsidiary of Eaton issued sustainability-linked senior notes (2022 Sustainability-Linked Notes) and senior notes (2022 Senior Notes, and collectively referred to as the Notes). The 2022 Sustainability-Linked Notes have a face amount of $1.3 billion, mature in 2033, and pay interest semi-annually at an initial interest rate of 4.15% per annum. Beginning in September 2028, the interest rate payable on the 2022 Sustainability-Linked Notes will be increased by an additional 25 basis points per annum if the Scope 1 and Scope 2 greenhouse gas emissions sustainability performance target is not met. The 2022 Senior Notes have a face amount of $700 million, mature in 2052, and pay interest semi-annually at 4.70% per annum. The issuer received proceeds totaling $1.98 billion from the issuance of the Notes, net of financing costs and discounts.
On October 3, 2022, the Company replaced its existing $2,000 million five-year revolving credit facility with a new $2,500 million five-year revolving credit facility that will expire on October 1, 2027. On the same date, the Company replaced its existing $500 million 364-day revolving credit facility with a new $500 million 364-day revolving credit facility that will expire on October 2, 2023. The revolving credit facilities totaling $3,000 million are used to support commercial paper borrowings and are fully and unconditionally guaranteed by Eaton and certain of its direct and indirect subsidiaries on an unsubordinated, unsecured basis. In October 2022, the Company also upsized its commercial paper program to $3,000 million. There were no borrowings outstanding under Eaton’s revolving credit facilities at September 30, 2022. The Company had access to the commercial paper markets through its $3,000 million commercial paper program, of which $878 million was outstanding on September 30, 2022.
In 2021, Eaton received proceeds of $3.1 billion from the sale of its Hydraulics business and paid $4.45 billion to acquire Tripp Lite and Mission Systems. In 2022, the Company paid $612 million to acquire Royal Power Solutions and received cash of $22 million from Danfoss A/S to fully settle all post-closing adjustments from the sale of the Hydraulics business.
Over the course of a year, cash, short-term investments, and short-term debt may fluctuate in order to manage global liquidity. As of September 30, 2022 and December 31, 2021, Eaton had cash of $231 million and $297 million, short-term investments of $287 million and $271 million, and short-term debt of $903 million and $13 million, respectively. Eaton believes it has the operating flexibility, cash flow, cash and short-term investment balances, availability under existing revolving credit facilities, and access to capital markets in excess of the liquidity necessary to meet future operating needs of the business, fund capital expenditures and acquisitions of businesses, as well as scheduled payments of long-term debt.
Eaton was in compliance with each of its debt covenants for all periods presented.
Cash Flows
A summary of cash flows is as follows:
|
Nine months ended
September 30 |
|||||||||||||||||
| (In millions) | 2022 | 2021 |
Change
from 2021 |
||||||||||||||
| Net cash provided by operating activities | $ | 1,347 | $ | 1,368 | $ | (21) | |||||||||||
| Net cash used in investing activities | (983) | (1,688) | 705 | ||||||||||||||
| Net cash provided by (used in) financing activities | (445) | 166 | (611) | ||||||||||||||
| Effect of currency on cash | 15 | (13) | 28 | ||||||||||||||
| Total decrease in cash | $ | (67) | $ | (167) | |||||||||||||
Operating Cash Flow
Net cash provided by operating activities decreased by $21 million in the first nine months of 2022 compared to 2021. The decrease in net cash provided by operating activities in the first nine months of 2022 was primarily due to higher working capital balances to support the Company’s organic growth, partially offset by taxes paid on the sale of the Hydraulics business in 2021, cash received from the termination of interest rate swaps in 2022, and lower pension contributions in 2022 due to a $200 million contribution to Eaton's U.S. qualified pension plan in 2021.
36
Investing Cash Flow
Net cash used in investing activities decreased by $705 million in the first nine months of 2022 compared to 2021. The decrease in the use of cash in the first nine months of 2022 was primarily driven by the decrease in cash paid for business acquisitions to $612 million in 2022 from $4,500 million in 2021, proceeds from the sale of certain office and distribution facilities in 2022, and the decrease in cash paid for investments in associate companies to $42 million in 2022 from $124 million in 2021, partially offset by proceeds received in 2021 from the sale of the Hydraulics business of $3,110 million and net purchases of short-term investments of $45 million in 2022 compared to net sales of $264 million in 2021.
Financing Cash Flow
Net cash used in financing activities increased by $611 million in the first nine months of 2022 compared to 2021. The increase in the use of cash in the first nine months of 2022 was primarily due to higher payments on borrowings of $2,008 million in 2022 compared to $1,011 million in 2021, and higher share repurchases of $286 million in 2022 compared to $122 million in 2021, partially offset by an increase in net proceeds of short-term debt to $896 million in 2022 from $430 million in 2021 and higher proceeds from borrowings of $1,995 million in 2022 compared to $1,798 million in 2021.
Uses of Cash
Capital Expenditures
Capital expenditures were $389 million and $412 million in the first nine months of 2022 and 2021, respectively. Eaton expects approximately $650 million in capital expenditures in 2022.
Dividends
Cash dividend payments were $977 million and $916 million in the first nine months of 2022 and 2021, respectively. Payment of quarterly dividends in the future depends upon the Company’s ability to generate net income and operating cash flows, among other factors, and is subject to declaration by the Eaton Board of Directors. The Company intends to continue to pay quarterly dividends in 2022.
Share Repurchases
On February 27, 2019, the Board of Directors adopted a share repurchase program for share repurchases up to $5.0 billion of ordinary shares (2019 Program). On February 23, 2022, the Board renewed the 2019 Program by providing authority for up to $5.0 billion in repurchases to be made during the three-year period commencing on that date (2022 Program). Under the 2022 Program, the ordinary shares are expected to be repurchased over time, depending on market conditions, the market price of ordinary shares, capital levels, and other considerations. In the first nine months of 2022, 2.0 million ordinary shares were repurchased under the 2022 program in the open market at a total cost of $286 million. In the first nine months of 2021, 0.9 million ordinary shares were repurchased under the 2019 Program in the open market at a total cost of $122 million. At September 30, 2022, there is $4,714 million still available for share repurchases under the 2022 Program. The Company will continue to pursue share repurchases in 2022 depending on market conditions and capital levels.
Acquisition of Businesses
The Company paid cash of $612 million and $4,500 million to acquire businesses in the first nine months of 2022 and 2021, respectively. The Company will continue to focus on deploying its capital toward businesses that provide opportunities for higher growth and strong returns, and align with secular trends and its power management strategies.
Debt
The Company manages a number of short-term and long-term debt instruments, including commercial paper. At September 30, 2022, the Company had Short-term debt of $903 million, Current portion of long-term debt of $23 million, and Long-term debt of $8,082 million.
37
Supply Chain Finance Program
The Company negotiates payment terms directly with its suppliers for the purchase of goods and services. In addition, a third-party financial institution offers a voluntary supply chain finance (SCF) program that enables certain of the Company’s suppliers, at the supplier’s sole discretion, to sell receivables due from the Company to the financial institution on terms directly negotiated with the financial institution. If a supplier elects to participate in the SCF program, the supplier decides which invoices are sold to the financial institution and the Company has no economic interest in a supplier’s decision to sell an invoice. The SCF program does not have a significant impact on the Company’s liquidity as payments by the Company to participating suppliers are paid to the financial institution on the invoice due date, regardless of whether an individual invoice is sold by the supplier to the financial institution. The amounts due to the financial institution for suppliers that participate in the SCF program are included in Accounts payable on the Company’s Consolidated Balance Sheets, and the associated payments are included in operating activities on the Condensed Consolidated Statements of Cash Flows. At September 30, 2022 and December 31, 2021, Accounts payable included $207 million and $151 million, respectively, payable to suppliers that have elected to participate in the SCF program.
Guaranteed Debt
Issuers, Guarantors and Guarantor Structure
Eaton Corporation has issued senior notes pursuant to indentures dated April 1, 1994 (the 1994 Indenture), November 20, 2012 (the 2012 Indenture), September 15, 2017 (the 2017 Indenture) and August 23, 2022 (as supplemented by the First and Second Supplemental Indentures of the same date, the 2022 Indenture). The senior notes of Eaton Corporation are registered under the Securities Act of 1933, as amended (the Registered Senior Notes). Eaton Capital Unlimited Company, a subsidiary of Eaton, is the issuer of four outstanding series of debt securities sold in offshore transactions under Regulation S promulgated under the Securities Act (the Eurobonds). The Eurobonds and the Registered Senior Notes (together, the Senior Notes) comprise substantially all of Eaton’s long-term indebtedness.
Substantially all of the Senior Notes, together with the credit facilities described above under Liquidity and Financial Condition (the Credit Facilities), are guaranteed by Eaton and 18 of its subsidiaries. Accordingly, they rank equally with each other. However, because these obligations are not secured, they would be effectively subordinated to any existing or future secured indebtedness of Eaton and its subsidiaries. As of September 30, 2022, Eaton has no material, long-term secured debt. The guaranteed Registered Senior Notes are also structurally subordinated to the liabilities of Eaton's subsidiaries that are not guarantors. Except as described below under Future Guarantors, Eaton is not obligated to cause its subsidiaries to guarantee the Registered Senior Notes.
The table set forth in Exhibit 22 filed with this Form 10-Q details the primary obligors and guarantors with respect to the guaranteed Registered Senior Notes.
Terms of Guarantees of Registered Securities
Payment of principal and interest on the Registered Senior Notes is guaranteed, on an unsecured, unsubordinated basis by the subsidiaries of Eaton set forth in the table referenced in Exhibit 22. Each guarantee is full and unconditional, and joint and several. Each guarantor's guarantee is an unsecured obligation that ranks equally with all its other unsecured and unsubordinated indebtedness. The obligations of each guarantor under its guarantee of the Registered Senior Notes is subject to a customary savings clause or similar provision designed to prevent such guarantee from constituting a fraudulent conveyance or otherwise legally impermissible or voidable obligation.
Though the terms of the indentures vary slightly, generally, each guarantee of the Registered Senior Notes by a guarantor that is a subsidiary of Eaton Corporation provides that it will be automatically and unconditionally released and discharged under certain circumstances, including, but not limited to:
(a)
the consummation of certain types of transactions permitted under the applicable indenture, including one that results in such guarantor ceasing to be a subsidiary; and
(b)
for Registered Senior Notes issued under the 2022 Indenture, when such guarantor is a guarantor or issuer of indebtedness in an aggregate outstanding principal amount of less than 25% of our total outstanding indebtedness.
Further, each guarantee by a direct or indirect parent of Eaton Corporation (other than Eaton) provides that it will also be released if:
38
(c)
such guarantee (so long as the guarantor is not obligated under any other U.S. debt obligations), becomes prohibited by any applicable law, rule or regulation or by any contractual obligation; or
(d)
such guarantee results in material adverse tax consequences to Eaton or any of its subsidiaries (so long as the applicable guarantor is not obligated under any other U.S. debt obligation).
The guarantee of Eaton does not contain any release provisions.
Future Guarantors
The 2012 and 2017 Indentures generally provide that, with certain limited exceptions, any subsidiary of Eaton must become a guarantor if it becomes obligated as borrower or guarantor under any series of debt securities or a syndicated credit facility. Further, the 2012 and 2017 Indentures provide that any entity that becomes a direct or indirect parent entity of Eaton Corporation and holds any material assets, with certain limited exceptions, or owes any material liabilities must become a guarantor. The 2022 Indenture provides only that, with certain limited exceptions, any subsidiary of Eaton must become a guarantor if it becomes obligated as borrower or guarantor under indebtedness with an aggregate outstanding principal amount in excess of 25% of the Parent and its Subsidiaries' then-outstanding indebtedness.
The 1994 Indenture does not contain provisions with respect to future guarantors.
Summarized Financial Information of Guarantors and Issuers
| (In millions) |
September 30,
2022 |
December 31,
2021 |
||||||||||||
| Current assets | $ | 3,671 | $ | 3,032 | ||||||||||
| Noncurrent assets | 12,984 | 11,553 | ||||||||||||
| Current liabilities | 3,333 | 3,950 | ||||||||||||
| Noncurrent liabilities | 9,983 | 8,461 | ||||||||||||
| Amounts due to subsidiaries that are non-issuers and non-guarantors - net | 17,765 | 18,006 | ||||||||||||
|
Nine months ended
September 30 |
||||||||||||||
| (In millions) | 2022 | |||||||||||||
| Net sales | $ | 8,377 | ||||||||||||
| Sales to subsidiaries that are non-issuers and non-guarantors | 686 | |||||||||||||
| Cost of products sold | 6,874 | |||||||||||||
| Expense from subsidiaries that are non-issuers and non-guarantors - net | 454 | |||||||||||||
| Net loss | (27) | |||||||||||||
The financial information presented is that of Eaton Corporation and the Guarantors, which includes Eaton Corporation plc, on a combined basis and the financial information of non-issuer and non-guarantor subsidiaries has been excluded. Intercompany balances and transactions between Eaton Corporation and Guarantors have been eliminated, and amounts due from, amounts due to, and transactions with non-issuer and non-guarantor subsidiaries have been presented separately.
39
FORWARD-LOOKING STATEMENTS
This Form 10-Q Report contains forward-looking statements concerning litigation, expected capital expenditures, future dividend payments, anticipated share repurchases, and expected restructuring charges. These statements may discuss goals, intentions and expectations as to future trends, plans, events, results of operations or financial condition, or state other information relating to Eaton, based on current beliefs of management as well as assumptions made by, and information currently available to, management. Forward-looking statements generally will be accompanied by words such as “anticipate,” “believe,” “could,” “estimate,” “expect,” “forecast,” “guidance,” “intend,” “may,” “possible,” “potential,” “predict,” “project” or other similar words, phrases or expressions. These statements should be used with caution and are subject to various risks and uncertainties, many of which are outside Eaton’s control. The following factors could cause actual results to differ materially from those in the forward-looking statements: the course of the COVID-19 pandemic, including government responses thereto and the rate of global economic recovery therefrom; unanticipated changes in the markets for the Company’s business segments; unanticipated downturns in business relationships with customers or their purchases from us; the availability of credit to customers and suppliers; supply chain disruptions, competitive pressures on sales and pricing; unanticipated changes in the cost of material, labor and other production costs, or unexpected costs that cannot be recouped in product pricing; the introduction of competing technologies; unexpected technical or marketing difficulties; unexpected claims, charges, litigation or dispute resolutions; strikes or other labor unrest; the impact of acquisitions and divestitures; unanticipated difficulties integrating acquisitions; new laws and governmental regulations; interest rate changes; tax rate changes or exposure to additional income tax liability; stock market and currency fluctuations; war, natural disasters, civil or political unrest or terrorism; and unanticipated deterioration of economic and financial conditions in the United States and around the world. Eaton does not assume any obligation to update these forward-looking statements.
ITEM 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
There have been no material changes in exposures to market risk since December 31, 2021.
ITEM 4.
CONTROLS AND PROCEDURES.
Evaluation of Disclosure Controls and Procedures - Pursuant to SEC Rule 13a-15, an evaluation was performed under the supervision and with the participation of Eaton’s management, including Craig Arnold - Principal Executive Officer; and Thomas B. Okray - Principal Financial Officer, of the effectiveness of the design and operation of the Company's disclosure controls and procedures. Based on that evaluation, management concluded that Eaton’s disclosure controls and procedures were effective as of September 30, 2022.
Disclosure controls and procedures are designed to ensure that information required to be disclosed in Eaton’s reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in Eaton’s reports filed under the Exchange Act is accumulated and communicated to management, including Eaton’s Principal Executive Officer and Principal Financial Officer, to allow timely decisions regarding required disclosure.
During the third quarter of 2022, there was no change in Eaton’s internal control over financial reporting that materially affected, or is reasonably likely to materially affect, internal control over financial reporting. Management is currently evaluating the impact of businesses acquired in the past twelve months on Eaton's internal control over financial reporting.
40
PART II — OTHER INFORMATION
ITEM 1.
LEGAL PROCEEDINGS.
Information regarding the Company's current legal proceedings is presented in Note 9 of the Notes to the condensed consolidated financial statements.
ITEM 1A.
RISK FACTORS.
“Item 1A. Risk Factors” in Eaton's 2021 Form 10-K includes a discussion of the Company's risk factors. There have been no material changes from the risk factors described in the 2021 Form 10-K, except as follows:
Significant shortages of raw materials, energy, components, and/or labor, or similar challenges for our customers or suppliers could adversely impact our results of operations.
Eaton's major requirements for raw materials are described in Item 1 “Raw Materials” of our Form 10-K for the year ended December 31, 2021. Shortages have continued to affect the prices Eaton's businesses are charged as global economies recover from the COVID-19 pandemic and react to Russia's ongoing invasion of Ukraine. Further, labor shortages persist broadly in select markets. Some of our suppliers have experienced the same conditions and in response, have continued to increase their prices in response to increases in their costs of raw materials, energy and/or labor. While we strive to recoup these increased costs through our pricing, if we are unable to do so without compromising the competitive position of our products and services, our results could continue to be impacted by this trend. Further, should these trends continue or worsen, the impact could have a material adverse impact on our operating results.
ITEM 2.
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
(c) Issuer's Purchases of Equity Securities
During the third quarter of 2022, 0.7 million ordinary shares were repurchased in the open market at a total cost of $100 million. These shares were repurchased under the program approved by the Board on February 23, 2022 (the 2022 Program). A summary of the shares repurchased in the third quarter of 2022 is as follows:
| Month |
Total number
of shares purchased |
Average
price paid per share |
Total number of
shares purchased as part of publicly announced plans or programs |
Approximate dollar value of shares that may yet be purchased under the plans or programs (in millions) | ||||||||||||||||||||||
| July | — | $ | — | — | $ | 4,814 | ||||||||||||||||||||
| August | — | $ | — | — | $ | 4,814 | ||||||||||||||||||||
| September | 721,726 | $ | 138.55 | 721,726 | $ | 4,714 | ||||||||||||||||||||
| Total | 721,726 | $ | 138.55 | 721,726 | ||||||||||||||||||||||
41
ITEM 6.
EXHIBITS.
Eaton Corporation plc
Third Quarter 2022 Report on Form 10-Q
| 3 (i) | |||||||||||
| 3 (ii) | |||||||||||
| 4.1 | |||||||||||
| 4.2 | |||||||||||
| 4.3 | |||||||||||
| 4.4 | |||||||||||
| 4.5 | |||||||||||
| 4.6 | |||||||||||
| 4.7 | |||||||||||
| 4.8 | |||||||||||
| 4.9 | |||||||||||
| 4.10 | |||||||||||
| 4.11 | Pursuant to Regulation S-K Item 601(b)(4), Eaton agrees to furnish to the SEC, upon request, a copy of the instruments defining the rights of holders of its long-term debt other than those set forth in Exhibits (4.2 - 4.7) hereto | ||||||||||
| 10.1 | |||||||||||
| 10.2 | |||||||||||
| 22 | |||||||||||
| 31.1 | |||||||||||
| 31.2 | |||||||||||
| 32.1 | |||||||||||
| 32.2 | |||||||||||
42
| 101.INS | XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. * | ||||||||||
| 101.SCH | XBRL Taxonomy Extension Schema Document * | ||||||||||
| 101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document * | ||||||||||
| 101.DEF | XBRL Taxonomy Extension Label Definition Document * | ||||||||||
| 101.LAB | XBRL Taxonomy Extension Label Linkbase Document * | ||||||||||
| 101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document * | ||||||||||
| 104 | Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101) | ||||||||||
_______________________________
| * | Submitted electronically herewith. | |||||||
43
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| EATON CORPORATION plc | ||||||||||||||
| Registrant | ||||||||||||||
| Date: | November 1, 2022 | By: | /s/ Thomas B. Okray | |||||||||||
| Thomas B. Okray | ||||||||||||||
| Principal Financial Officer | ||||||||||||||
| (On behalf of the registrant and as Principal Financial Officer) | ||||||||||||||
44
TABLE OF CONTENTS
Part I Financial InformationprintItem 1. Financial StatementsprintNote 1. Basis Of PresentationprintNote 2. Acquisitions and Divestiture Of BusinessesprintNote 3. Revenue RecognitionprintNote 4. Credit Losses For ReceivablesprintNote 5. InventoryprintNote 6. GoodwillprintNote 7. DebtprintNote 8. Retirement Benefits PlansprintNote 9. Legal ContingenciesprintNote 10. Income TaxesprintNote 11. EquityprintNote 12. Fair Value MeasurementsprintNote 13. Derivative Financial Instruments and Hedging ActivitiesprintNote 14. Restructuring ChargesprintNote 15. Business Segment InformationprintItem 2. Management S Discussion and Analysis Of Financial Condition and Results Of OperationsprintItem 3. Quantitative and Qualitative Disclosures About Market RiskprintItem 4. Controls and ProceduresprintPart II Other InformationprintItem 1. Legal ProceedingsprintItem 1A. Risk FactorsprintItem 2. Unregistered Sales Of Equity Securities and Use Of ProceedsprintItem 6. Exhibitsprint